VANGUARD BOND INDEX FUND INC, 497, 2000-01-10

VANGUARD BOND INDEX FUND INC
497, 2000-01-10

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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. 26 [X]

and

REGISTRATION STATEMENT (NO. 811-4681) UNDER THE INVESTMENT COMPANY
ACT OF 1940

Amendment No. 28 [X]

VANGUARD BOND INDEX FUNDS
(Exact Name of Registrant as Specified in Declaration of Trust)

P.O. Box 2600,
Valley Forge, PA 19482
(Address of Principal Executive Office)

Registrant's Telephone Number (610) 669-1000

R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482

It is proposed that this filing become effective: January 3, 2000, pursuant
to paragraph (b) of Rule 485.

Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.

We have elected to register an indefinite number of shares pursuant to Regu-
lation 24f-2 under the Investment Company Act of 1940. Registrant filed its
Rule 24f-2 Notice for the year ended December 31, 1998 on March 29, 1999.

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<PAGE>

VANGUARD BOND INDEX FUNDS

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<C> <C> <S>
Item 1. Front and Back Cover Pages ........... Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks, and Performance................ Fund Profiles
Item 3. Risk/Return Summary: Fee Table........ Fee Table
Item 4. Investment Objectives, Principal
Investment Strategies, and Related
Risks................................. More on the Funds
Item 5. Management's Discussion of Fund
Performance........................... Herein incorporated by
reference to Registrant's
Annual Report to
Shareholders dated December
31, 1998, and the Semi-
Annual Report to
Shareholders dated June 30,
1999, filed with the
Securities and Exchange
Commission's EDGAR system
on March 3, 1999 and
September 7, 1999,
respectively
Item 6. Management, Organization, and Capital
Structure............................. The Funds and Vanguard;
Investment Adviser
Item 7. Shareholder Information............... Share Price; Dividends,
Capital Gains, and Taxes;
Investing with Vanguard
Item 8. Distribution Arrangements............. Inside Front Cover Page
Item 9. Financial Highlights Information...... Financial Highlights
<CAPTION>
Form N-1A Location in Statement
Item Number of Additional Information
<C> <C> <S>
Item 10. Cover Page and Table of Contents...... Cover Page; Table of
Contents
Item 11. Fund History.......................... Description of the Trust
Item 12. Description of the Fund and its
Investments and Risks................. Investment Policies;
Description of the Trust;
and Fundamental Investment
Limitations
Item 13. Management of the Fund................ Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities......................... Management of the Trust
Item 15. Investment Advisory and Other
Services.............................. Investment Advisory
Services
Item 16. Brokerage Allocation and Other
Practices............................. Portfolio Transactions
Item 17. Capital Stock and Other Securities.... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of
Shares ............................... Purchase of Shares;
Redemption of Shares; and
Share Price
Item 19. Taxation of the Fund.................. Description of the Trust
Item 20. Underwriters.......................... Not Applicable
Item 21. Calculation of Performance Data....... Yield and Total Return
Item 22. Financial Statements.................. Financial Statements
</TABLE>

<PAGE>

Vanguard Bond Index Funds

Prospectus
January 3, 2000

A Group of Bond Index Mutual Funds

Contents

1 An Introduction to Index Funds

2 Fund Profiles

2 Vanguard Total Bond Market Index Fund

5 Vanguard Short-Term Bond Index Fund

8 Vanguard Intermediate-Term Bond Index Fund

11 Vanguard Long-Term Bond Index Fund

14 More on the Funds

20 The Funds and Vanguard

20 Investment Adviser

21 Dividends, Capital Gains, and Taxes

22 Share Price

23 Financial Highlights

26 Investing with Vanguard

26 Services and Account Features

27 Types of Accounts

27 Buying Shares

29 Redeeming Shares

32 Transferring Registration

33 Fund and Account Updates

Glossary (inside back cover)

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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 features two separate classes of shares:
Investor and Institutional. Total Bond Market Index Fund Investor Shares have an
investment minimum of $3,000, and are available through this prospectus (for
individual investors) and a separate prospectus (for participants in employer-
sponsored retirement or savings plans). Total Bond Market Index Fund
Institutional Shares have an investment minimum of $10 million, and are
available through a separate prospectus. Investor Shares and Institutional
Shares do not have the same expenses; as a result, the performance of these
separate classes could differ.
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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 investment performance. An index (or "passively
managed") fund tries to match, as closely as possible, the performance of an
established target index. The fund does this by holding either all or a
representative sample of the securities in the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.

Bond index funds may seek to track indexes that hold a certain type of
bond--such as short-term or long-term bonds--or they may seek to track indexes
that consist of a broader range of bonds--for example, the entire U.S. bond
market.

Index funds are not actively managed by investment advisers who buy and sell
securities based on research and analysis. 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 Fund The overall bond market
Vanguard Short-Term Bond Index Fund Short-term bonds
Vanguard Intermediate-Term Bond Index Fund Intermediate-term bonds
Vanguard Long-Term Bond Index Fund Long-term bonds
---------------------------------------------------------------------------

This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>

Fund Profile--Vanguard Total Bond Market Index Fund

The following profile summarizes key features of Vanguard Total Bond Market
Index Fund.

Investment Objective
The Fund seeks to match the performance of a broad, market-weighted bond index.

Investment Strategies
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Aggregate Bond Index. This Index measures the total universe of 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 bonds, and greatest for
longer-term bonds.

. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally higher for short-term
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. 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 risk of investing
in the Fund. The bar chart shows the Fund's performance in each calendar year
over a ten-year period. The table shows how the Fund's average annual returns
for one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>

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Annual Total Returns*
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[GRAPH]

1989 13.64%
1990 8.65%
1991 15.25%
1992 7.14%
1993 9.68%
1994 -2.66%
1995 18.18%
1996 3.58%
1997 9.44%
1998 8.58%

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*Total return figures do not reflect the annual account maintenance fee of $10.
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During the period shown in the bar chart, the highest return for a calendar
quarter was 7.60% (quarter ended June 30, 1989) and the lowest return for a
quarter was -2.71% (quarter ended March 31, 1994).

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Average Annual Total Returns for Years Ended December 31, 1998
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1 Year 5 Years 10 Years
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Vanguard Total Bond Market Index Fund* 8.58% 7.21% 9.00%
Lehman Brothers Aggregate Bond Index 8.69 7.27 9.26
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*Total return figures do not reflect the annual account maintenance fee of $10.
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Fees and expenses
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.

Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**

Annual Fund Operating Expenses (expenses deducted from the Fund's
assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%

*A portfolio transaction fee of 0.18% may apply to aggregate
purchases over $250 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends
four times per year. If your distribution that month is less than
the fee, fractional shares will be automatically redeemed to make up
the difference.
<PAGE>

Fund Profile-Vanguard Total Bond Market Index Fund (continued)

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.

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1 Year 3 Years 5 Years 10 Years
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$20 $64 $113 $255
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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
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December

Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception

Inception Date
December 11, 1986

Net Assets as of June 30, 1999
$8.78 billion (for Investor Shares)

Suitable for IRAs
Yes

Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors

Newspaper Abbreviation
TotBd

Vanguard Fund Number
084

Cusip Number
921937108

Ticker Symbol
VBMFX
<PAGE>

Fund Profile--Vanguard Short-Term Bond Index Fund

The following profile summarizes key features of Vanguard Short-Term Bond Index
Fund.

Investment objective
The Fund seeks to match the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.

Investment Strategies
The Fund employs a "passively managed"--or index--investment approach, by
holding a 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 bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.

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Annual Total Returns*
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[GRAPH]

1995 12.88%
1996 4.55%
1997 7.04%
1998 7.63%

Fund Profile--Vanguard Short-Term Bond Index Fund (continued)

During the period shown in the bar chart, the highest return for a calendar
quarter was 3.96% (quarter ended March 31, 1995) and the lowest return for a
quarter was -0.12% (quarter ended March 31, 1996).

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Average Annual Total Returns for Years Ended December 31, 1998
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1 Year Since Inception*
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Vanguard Short-Term Bond Index Fund** 7.63% 6.48%
Lehman Brothers 1-5 Year
Government/Corporate Bond Index 7.63 6.56
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*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses (expenses deducted from the Fund's
assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%

*A portfolio transaction fee of 0.15% may apply to aggregate
purchases over $50 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends
four times per year. If your distribution that month is less than
the fee, fractional shares will be automatically redeemed to make up
the difference.

- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------

This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>

Additional Information

Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December

Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception

Inception Date
March 1, 1994

Net Assets as of June 30, 1999
$937 million

Suitable for IRAs
Yes

Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors

Newspaper Abbreviation
STBond

Vanguard Fund Number
132

Cusip Number
921937207

Ticker Symbol
VBISX
<PAGE>

Fund Profile--Vanguard Intermediate-Term Bond Index Fund

The following profile summarizes key features of Vanguard Intermediate-Term Bond
Index Fund.

Investment Objective
The Fund seeks to match the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.

Investment Strategies
The Fund employs a "passively managed"--or index--investment approach, by
holding a 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 bonds.

. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for
intermediate-term 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 returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
<PAGE>

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Annual Total Returns*
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[GRAPH]

1995 21.07%
1996 2.55%
1997 9.41%
1998 10.09%

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).

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Average Annual Total Returns for Years Ended December 31, 1998
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1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund** 10.09% 8.02%
Lehman Brothers 5-10 Year Government/Corporate
Bond Index 10.14 8.12
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*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses (expenses deducted from the Fund's
assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%

*A portfolio transaction fee of 0.23% may apply to aggregate
purchases over $50 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends
four times per year. If your distribution that month is less than
the fee, fractional shares will be automatically redeemed to make up
the difference.
<PAGE>

Fund Profile--Vanguard Intermediate-Term Bond Index Fund (continued)

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
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December

Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception

Inception Date
March 1, 1994

Net Assets as of June 30, 1999
$1.3 billion

Suitable for IRAs
Yes

Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors

Newspaper Abbreviation
ITBond

Vanguard Fund Number
314

Cusip Number
921937306

Ticker Symbol
VBIIX
<PAGE>

Fund Profile--Vanguard Long-Term Bond Index Fund

The following profile summarizes key features of Vanguard Long-Term Bond Index
Fund.

Investment Objective
The Fund seeks to match the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.

Investment Strategies
The Fund employs a "passively managed"--or index--investment approach, by
holding a 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 bonds.

. 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 returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
<PAGE>

Fund Profile-Vanguard Long-Term Bond Index Fund (continued)

- --------------------------------------------------------------------------------
Annual Total Returns*
- --------------------------------------------------------------------------------

[CHART]

1995 29.72%
1996 -0.26%
1997 14.30%
1998 11.98%

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, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund** 11.98% 9.93%
Lehman Brothers Long Government/Corporate Bond Index 11.77 10.04
- --------------------------------------------------------------------------------
*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses (expenses deducted from the Fund's
assets)
Management Expenses: 0.15%
12b-1 Distribution Fees: None
Other Expenses: 0.05%
Total Annual Fund Operating Expenses: 0.20%

*A portfolio transaction fee of 0.21% may apply to aggregate
purchases over $10 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends
four times per year. If your distribution that month is less than
the fee, fractional shares will be automatically redeemed to make up
the difference.
<PAGE>

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
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December

Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception

Inception Date
March 1, 1994

Net Assets as of June 30, 1999
$275 million

Suitable for IRAs
Yes

Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors

Newspaper Abbreviation
LTBond

Vanguard Fund Number
522

Cusip Number
921937405

Ticker Symbol
VBLTX
<PAGE>

More on the Funds

The following sections discuss other important features of Vanguard Bond Index
Funds, including indexing methods, security selection, additional risk
information, costs and market-timing, turnover rate, and other investment
policies and risks.

Why invest in index funds?
Index funds appeal to many investors for a number of reasons:

. Diversification. Index funds generally invest in a diversified mix of
companies and industries.

. Low cost. Index funds 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.

. Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their benchmarks.

Indexing Methods
In seeking to track a particular index, a fund generally uses one of two methods
to select the stocks or bonds in which it invests.

Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. This is
called a "replication" method. For example, if 5% of the S&P 500 Index were made
up of the stock of a specific company, a fund tracking that index would invest
about 5% of its assets in that company.

Other index funds may use a different security selection process. Because
it would be impractical to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, includes more
than 7,200 bonds), funds tracking these larger indexes use a "sampling"
technique. Using sophisticated computer programs, these funds select securities
that will recreate their target indexes in terms of industry weightings, market
capitalization, and other characteristics. For instance, if 30% of the Lehman
Brothers Aggregate Bond Index were made up of mortgage-backed securities, the
Total Bond Market Index Fund would invest about 30% of its assets in mortgage-
backed securities that have similar characteristics as a group to those in the
Index. Each of the Vanguard Bond Index Funds employs this method of indexing.

The following table shows the number of bonds held by each of the Funds as
of June 30, 1999.

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 in-creases 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

<PAGE>

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 June 30, 1999, each Fund's target index was composed of the following
types of bonds:

- --------------------------------------------------------------------------------
Target Index Composition
----------------------------------------------
International
U.S. Mortgage- Dollar-
Vanguard Fund Government Corporate Backed Denominated Total
- --------------------------------------------------------------------------------
Total Bond Market Index 43.4% 18.7% 33.4% 4.5% 100%
- --------------------------------------------------------------------------------
Short-Term Bond Index 77.1% 17.7% 0.0% 5.2% 100%
- --------------------------------------------------------------------------------
Intermediate-Term
Bond Index 54.7% 33.1% 0.0% 12.2% 100%
- --------------------------------------------------------------------------------
Long-Term Bond Index 63.2% 30.7% 0.0% 6.1% 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 Mortgage Association (GNMA or
"Ginnie Mae"), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Federal National Mortgage Association (FNMA or "Fannie Mae"). GNMAs are
guaranteed by the full faith and credit of the U.S. government as to the
timely payment of principal and interest; mortgage securities issued by
other government agencies or private corporations are not.
(Note: The Total Bond Market Index Fund may also invest to a lesser
extent in conventional mortgage securities, which are packaged by private
corporations and are not guaranteed by the U.S. government.)

. International dollar-denominated bonds (or yankee bonds) are bonds
denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars rather than the currency
of the issuer's country, the investor is not exposed to currency risk;
rather, the issuer assumes that risk, usually in order to attract U.S.
investors.
<PAGE>

PLAIN TALK ABOUT

Bonds and Interest Rates

As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.

PLAIN TALK ABOUT

Bond Maturities

A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 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.

Additional Risk Information

The Funds are subject to several risks associated with investments in bonds.

Each Fund is subject to interest rate risk, which is the possibility that bond
prices overall will decline over short or even long periods due to rising
interest rates. Interest rate risk should be low for shorter-term bonds,
moderate for intermediate-term bonds, and high for longer-term bonds.

Changes in interest rates will affect bond income as well as bond prices.

Each Fund is subject to income risk, which is the possibility that a Fund's
dividends (income) will decline due to falling interest rates. Income risk is
generally higher for short-term bonds and lower for long-term bonds.

In the past, bond investors have seen the value of their investment rise
and fall--sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.

Because each Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of each Fund's assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.

- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------

These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or any Fund in
particular.

While falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
<PAGE>

Because it invests in mortgage-backed securities, the Total Bond Market Index
Fund is subject to prepayment risk, which is the possibility that during periods
of falling interest rates, a homeowner will repay a higher-yielding mortgage
earlier than scheduled. Forced to reinvest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the opportunity
for additional price appreciation associated with falling rates.

With only a portion of its assets invested in mortgage-backed securities,
prepayment risk for the Total Bond Market Index Fund is moderate.

Each Fund is subject to credit risk, which is the possibility that a bond issuer
will fail to pay interest and principal in a timely manner.

The credit quality of each Fund is expected to be very high, and thus
credit risk should be low. The following table shows the weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, as of June 30, 1999.

- --------------------------------------------------------------------------------
Average Credit Quality
-------------------------------------
Fund Fund's Holdings Target Index
- --------------------------------------------------------------------------------
Total Bond Market Aa1 Aaa
Short-Term Bond Aa1 Aaa
Intermediate-Term Bond Aa1 Aaa
Long-Term Bond Aa1 Aaa
- --------------------------------------------------------------------------------

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

Credit Quality

A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."
<PAGE>

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.

To help you distinguish between the Funds and their various risks, a
summary table is provided below.

- --------------------------------------------------------------------------------
Risks of the Funds
- --------------------------------------------------------------------------------
Prepayment/
Income Interest Call Credit
Fund Risk Rate Risk Risk Risk
- --------------------------------------------------------------------------------
Total Bond Market Moderate Moderate Moderate Low
Short-Term Bond High Low Low Low
Intermediate-Term Bond Moderate Moderate Low Low
Long-Term Bond 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.

Costs and Market-Timing
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, Vanguard Bond Index Funds have adopted the following policies, among
others, to discourage short-term trading:

. Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.

. There is a limit on the number of times you can exchange into or out of a
Fund (see "Redeeming Shares" in the Investing with Vanguard section).

. Each Fund reserves the right to stop offering shares at any time.

The Vanguard funds do not permit market-timing. Do not invest in these
Funds if you are a market-timer.
<PAGE>

Turnover Rate
Although the Funds generally seek to invest for the long term, they may sell
securities regardless of how long the securities have been held. Shorter-term
bonds will mature or be sold, and need to be replaced, more frequently than
longer-term bonds. As a result, shorter-term bond funds tend to have higher
turnover rates than longer-term bond funds.

Other Investment Policies and Risks
Besides investing in fixed-income securities comprising its target index, each
Fund may invest up to 35% of its total assets, 20% in the case of the Total Bond
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.

The Funds may invest, to a limited extent, in derivatives.

The Funds may invest, to a limited extent, in bond (interest rate) futures
and options contracts and other types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. The Funds will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
a Fund acquires an interest cannot exceed 20% of the Fund's total assets. The
reasons for which a Fund will invest in futures and options are:

. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.

. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.

The Funds may also invest in a relatively conservative class of
collateralized mortgage obligations (CMOs), which offer a high degree of
cash-flow predictability and less vulnerability to mortgage prepayment risk. To
reduce credit risk, a Fund may purchase these less-risky classes of CMOs only if
they are issued by agencies of the U.S. government or, if issued by private
companies, carry high-quality investment-grade ratings.

PLAIN TALK ABOUT

Turnover Rate

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed domestic bond
funds is roughly 69%; for all domestic bond funds, the average turnover rate is
approximately 90%, according to Morningstar, Inc.

PLAIN TALK ABOUT

Derivatives

A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
<PAGE>

PLAIN TALK ABOUT

Vanguard's Unique Corporate Structure

The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.

The Funds and Vanguard

Vanguard Bond Index Funds are members of The Vanguard Group, a family of more
than 35 investment companies with more than 100 distinct investment portfolios
holding assets with more than $510 billion. All of the Vanguard funds share in
the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.

Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

Investment Adviser

Vanguard's Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, provides advisory services on an at-cost basis to Vanguard Bond Index
Funds. For the fiscal year ended December 31, 1998, the Funds' advisory fees
represented an effective annual rate of 0.01% of each Fund's average net assets.

The Funds have authorized the Group to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the funds.

PLAIN TALK ABOUT

The Funds' Adviser

Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of December 31, 1998, the Group managed more than $127
billion in total assets.

The individuals responsible for overseeing the implementation of the Funds'
investment strategies are:

Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal fixed-
income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.

Kenneth E. Volpert, CFA, Principal, and head of Vanguard's Bond Index
Group; Fund Manager of the Total Bond Market and Intermediate-Term Bond Index
Funds since their inception; has worked in investment management since 1981; has
managed portfolio investments since 1982; B.S., University of Illinois; M.B.A.,
University of Chicago.

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).
<PAGE>

Dividends, Capital Gains, and Taxes

As a shareholder, you are entitled to your share of a Fund's net income
(interest less expenses). The Funds' income dividends accrue daily and are
distributed monthly; capital gains distributions generally occur in December. In
addition, the Funds may occasionally be required to make supplemental capital
gains distributions at some other time during the year.

You can receive distributions of income or capital gains in cash, or you
can have them automatically invested in more shares of the Funds. In either
case, these distributions are taxable to you. It is important to note that
distributions of dividends and capital gains that are declared in December--if
paid to you by the end of January--are taxed as if they had been paid to you in
December.

If you have chosen to receive dividend and/or capital gains distributions
in cash, and the postal or other delivery service is unable to deliver checks to
your address of record, we will change the distribution option so that all
dividends and other distributions are automatically invested in additional
shares. We will not pay interest on uncashed distribution checks.

Vanguard will send you a statement each year showing the tax status of all
your distributions.

. The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.

. Any distributions of net long-term capital gains by a Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.

. Although the Funds do not seek to realize capital gains, such gains are
realized from time to time as by-products of their ordinary investment
activities. Consequently, distributions may vary from year to year.

. If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.

. Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.

The tax information in this prospectus is provided as general information
and will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in any of the Funds.

Important Note: By law, each Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.

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.

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>

Share Price

Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share for the Short-, Intermediate-, and Long-Term Bond Index Funds is
computed by adding up the total value of the Fund's investments and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:

Total Assets - Liabilities
Net Asset Value = ---------------------------------
Number of Shares Outstanding

Net asset value per share for the Total Bond Market Index Fund is computed
in a similar way, by dividing the net assets attributed to each class by the
number of Fund shares outstanding for each class.

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. A Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.

A Note on Pricing: Each Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.

Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
TotBd, STBond, ITBond, and LTBond.
<PAGE>

Financial Highlights

The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception,
and certain information reflects financial results for a single Fund share in
each case. The total returns in each table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
derived from the financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, whose report--along with each Funds' financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------

Vanguard Total Bond Market Index Fund
Investor Shares
Year Ended December 31,
Six Months Ended ------------------------------------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.27 $ 10.09 $ 9.84 $ 10.14 $ 9.17 $ 10.06
- ------------------------------------------------------------------------------------------------------------------------------------

Investment Operations
Net Investment Income .304 .624 .645 .640 .650 .622
Net Realized and Unrealized
Gain (Loss) on Investments (.445) .218 .250 (.300) .970 (.888)
-----------------------------------------------------------------------------------------------

Total from Investment
Operations (.141) .842 .895 .340 1.620 (.266)
-----------------------------------------------------------------------------------------------

Distributions
Dividends from Net Investment
Income (.304) (.624) (.645) (.640) (.650) (.622)
Distributions from Realized
Capital Gains (.015) (.038) -- -- -- (.002)
-----------------------------------------------------------------------------------------------

Total Distributions (.319) (.662) (.645) (.640) (.650) (.624)
- -----------------------------------------------------------------------------------------------------------------------------------

Net Asset Value, End of Period $ 9.81 $ 10.27 $ 10.09 $ 9.84 $ 10.14 $ 9.17
===================================================================================================================================

Total Return* -1.41% 8.58% 9.44% 3.58% 18.18% -2.66%
===================================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period
(Millions) $ 8,787 $ 7,765 $ 5,129 $ 2,962 $ 2,405 $ 1,731
Ratio of Total Expenses to
Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%
Ratio of Net Investment Income
to Average Net Assets 6.08%+ 6.10% 6.54% 6.54% 6.66% 6.57%
Turnover Rate 61% 57%** 39% 39% 36% 33%
===================================================================================================================================
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of $10.
**Turnover rate excluding in-kind redemptions was 56%.
+ Annualized.

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 six months ended June 30, 1999, began with a net asset value
(price) of $10.27 per share. During the six months, the Fund earned $.304 per
share from investment income (interest and dividends). There was a decline of
$.445 per share in the value of investments held or sold by the Fund, resulting
in a net decline of $.141 from investment operations.

Shareholders received $.319 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 of $.141 per share minus the distributions ($.319 per
share) resulted in a share price of $9.81 at the end of the year. This was a
decrease of $.46 per share (from $10.27 at the beginning of the year to $9.81 at
the end of the six months). For a shareholder who reinvested the distributions
in the purchase of more shares, the total return from the Fund was -1.41% for
the six months.

As of June 30, 1999, the Fund had $8.79 billion in net assets. For the six
months, its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its
net investment income amounted to 6.08% of its average net assets. It sold and
replaced securities valued at 61% of its net assets.
<PAGE>

- ------------------------------------------------------------------------------------------------------------------------------------

Vanguard Short-Term Bond Index Fund
Year Ended December 31,
Six Months Ended --------------------------------------------------- Mar. 1* to
June 30, 1999 1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.10 $10.00 $9.92 $10.07 $9.50 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------

Investment Operations
Net Investment Income .263 .574 .597 .587 .623 .463
Net Realized and Unrealized Gain
(Loss) on Investments (.206) .168 .080 (.146) .570 (.500)
-------------------------------------------------------------------------------------

Total from Investment Operations .057 .742 .677 .441 1.193 (.037)
Distributions
Dividends from Net Investment Income (.263) (.574) (.597) (.587) (.623) (.463)
Distributions from Realized Capital Gains (.034) (.068) -- (.004) -- --
-------------------------------------------------------------------------------------
Total Distributions (.297) (.642) (.597) (.591) (.623) (.463)
- ------------------------------------------------------------------------------------------------------------------------------------

Net Asset Value, End of Period $9.86 $10.10 $10.00 $9.92 $10.07 $9.50
====================================================================================================================================

Total Return** 0.57% 7.63% 7.04% 4.55% 12.88% -0.37%
====================================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $937 $709 $446 $328 $208 $77
Ratio of Total Expenses to Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to
Average Net Assets 5.33%+ 5.68% 6.03% 5.93% 6.28% 5.77%+
Turnover Rate 122% 112% 88% 65% 65% 53%
====================================================================================================================================

</TABLE>

* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
**Total return figures do not reflect the annual account maintenance fee of $10.
+ Annualized.

- ------------------------------------------------------------------------------------------------------------------------------------

Vanguard Intermediate-Term Bond Index Fund
Year Ended December 31,
Six Months Ended --------------------------------------------------- Mar. 1* to
June 30, 1999 1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.48 $10.20 $9.96 $10.37 $9.18 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------

Investment Operations
Net Investment Income .317 .647 .661 .648 .661 .533
Net Realized and Unrealized Gain
(Loss) on Investments (.616) .353 .240 (.406) 1.217 (.820)
-------------------------------------------------------------------------------------
Total from Investment Operations (.299) 1.000 .901 .242 1.878 (.287)
-------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.317) (.647) (.661) (.648) (.661) (.533)
Distributions from Realized Capital Gains (.034) (.073) -- (.004) (.027) --
-------------------------------------------------------------------------------------
Total Distributions (.351) (.720) (.661) (.652) (.688) (.533)
- ------------------------------------------------------------------------------------------------------------------------------------

Net Asset Value, End of Period $9.83 $10.48 $10.20 $9.96 $10.37 $9.18
====================================================================================================================================

Total Return** -2.90% 10.09% 9.41% 2.55% 21.07% -2.88%
====================================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $1,347 $1,102 $687 $460 $346 $71
Ratio of Total Expenses to Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to
Average Net Assets 6.30%+ 6.23% 6.64% 6.54% 6.55% 6.88%
Turnover Rate 155% 77% 56% 80% 71% 63%
====================================================================================================================================

</TABLE>

* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Annualized.
<PAGE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------

Vanguard Long-Term Bond Index Fund
Year Ended December 31,
Six Months Ended --------------------------------------------------- Mar. 1* to
June 30, 1999 1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.32 $10.78 $10.08 $10.82 $8.96 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------

Investment Operations
Net Investment Income .328 .666 .678 .674 .692 .586
Net Realized and Unrealized Gain
(Loss) on Investments (1.011) .588 .700 (.731) 1.884 (1.040)
Total from Investment Operations (.683) 1.254 1.378 (.057) 2.576 (.454)
Distributions
Dividends from Net Investment Income (.328) (.666) (.678) (.674) (.692) (.586)
Distributions from Realized Capital Gains (.019) (.048) -- (.009) (.024) --
Total Distributions (.347) (.714) (.678) (.683) (.716) (.586)
- ------------------------------------------------------------------------------------------------------------------------------------

Net Asset Value, End of Period $10.29 $11.32 $10.78 $10.08 $10.82 $8.96
====================================================================================================================================

Total Return** -6.12% 11.98% 14.30% -0.26% 29.72% -4.53%
- ------------------------------------------------------------------------------------------------------------------------------------

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $275 $210 $88 $44 $24 $9
Ratio of Total Expenses to Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to
Average Net Assets 6.15%+ 6.01% 6.66% 6.75% 6.90% 7.70%+
Turnover Rate 67%+ 57% 58% 46% 45% 70%
====================================================================================================================================

</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>

Investing with Vanguard

Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?

Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.

The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC]. Please call us to request copies.

Services and Account Features

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for these Funds unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting [GRAPHIC]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service [GRAPHIC]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service [GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) [GRAPHIC]
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 [GRAPHIC]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (ON-BOARD) [GRAPHIC]
Toll-free 24-hour access to Vanguard fund and account informationas well as some
transactionsby using any touch-tone phone. Tele-Account provides total return,
share price, price change, and yield quotations for all Vanguard funds; gives
your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
. Open a new account.*
. Buy, sell, or exchange shares of most funds.
. Change your name/address.
. Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone: 1-800-
952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
<PAGE>

- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------

Types of Accounts

Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For Individual Retirement Accounts [GRAPHIC]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
For Third-Party Trustee Retirement Investments
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
Vanguard Prototype Plans
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------

Buying Shares

You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of the Total Bond Market Index Fund into Institutional Shares provided that you
meet the minimum initial requirements for Institutional Shares.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).

add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
Each Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance at that time is below $2,500.
The fee is waived if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
<PAGE>

Buying Shares (continued)

- --------------------------------------------------------------------------------
By Mail to . . . [GRAPHIC]
open a new account
Complete and sign the application form and enclose your check.

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.

Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Total Bond Market Index Fund-84;
Vanguard Short-Term Bond Index Fund-132;
Vanguard Intermediate-Term Bond Index Fund-314;
Vanguard Long-Term Bond Index Fund-522
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 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
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . . [GRAPHIC]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).

add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.

Wire to:
FRB ABA 021001088
HSBC Bank USA
<PAGE>

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Total Bond Market Index Fund-84;
Vanguard Short-Term Bond Index Fund-132;
Vanguard Intermediate-Term Bond Index Fund-314;
Vanguard Long-Term Bond Index Fund-522
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------

Redeeming Shares

This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.

When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.

*May require a signature guarantee; see footnote on page 32.

When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.

In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is requested and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------

How to Request a Redemption
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
- --------------------------------------------------------------------------------
Online Requests

Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
<PAGE>

Redeeming Shares (continued)

Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from a Fund to open
an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
x The ten-digit account number.
x The name and address exactly as registered on the account.
x The primary Social Security or employer identification number as registered
on the account.
x The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
<PAGE>

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 . . .

It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.

If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------

OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.

For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.

For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Note: Wire redemptions of less than $5,000 are subject to a $5 processing fee.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
<PAGE>

Redeeming Shares (continued)

FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions.

Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:

x The Fund name and account number.
x The amount of the transaction (in dollars or shares).
x Signatures of all owners exactly as registered on the account (for mail
requests).
x Signature guarantees (if required).*
x Any supporting legal documentation that may be required.
x Any outstanding certificates representing shares to be redeemed.

*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.

Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------

Transferring Registration

You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>

For clients of Vanguard's Institutional Division . . .

Fund and Account Updates

STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.

In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.

To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
Average Cost Review Statement [GRAPHIC]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
<PAGE>

(This page intentionally left blank.)
<PAGE>

Glossary of Investment Terms

Active Management
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.

Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.

Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.

Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.

Corporate Bond
An IOU issued by a business that wants to borrow money. As with other types of
bonds, the issuer promises to repay the borrowed money on a specific date and to
make interest payments in the meantime.

Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.

Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.

Index
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.

International Dollar-Denominated Bond
A bond denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars, an investor is not exposed to
foreign currency risk.

Investment Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.

Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.

Mortgage-Backed Security
A bond or pass-through certificate that represents an interest in an underlying
pool of mortgages and is issued by any number of government agencies or private
corporations. Unlike ordinary fixed-income securities, mortgage-backed
securities pay both interest and principal as part of their regular payments.

Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

Passive Management
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.

Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>

[VANGUARD 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 Report to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.

Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:

The Vanguard Group
Investor Information
Department
P.O. Box 2600
Valley Forge, PA 19482-2600

Telephone:
1-800-662-7447 (SHIP)

Text Telephone:
1-800-952-3335

World Wide Web:
www.vanguard.com

If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:

Client Services Department
Telephone:
1-800-662-2739 (CREW)

Text Telephone:
1-800-749-7273

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, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC 20549-
6009.

Funds' Investment Company Act
file number: 811-4681

P084N-01/03/2000
<PAGE>

Vanguard Bond Index Funds
Participant Prospectus
January 3, 2000
A Group of Bond Index Mutual Funds

Contents

1 An Introduction to Index Funds

2 Fund Profiles

2 Vanguard Total Bond Market Index Fund

5 Vanguard Short-Term Bond Index Fund

8 Vanguard Intermediate-Term Bond Index Fund

11 Vanguard Long-Term Bond Index Fund

14 More on the Funds

20 The Funds and Vanguard

20 Investment Adviser

21 Dividends, Capital Gains, and Taxes

21 Share Price

22 Financial Highlights

25 Investing with Vanguard

25 Accessing Fund Information by Computer

Glossary (inside back cover)

- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Bond Index Funds. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide which Funds, if any, are the
right investments for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Important Note
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.

The Total Bond Market Index Fund features two separate classes of shares:
Investor and Institutional. Total Bond Market Index Fund Investor Shares are
offered through this prospectus. Total Bond Market Index Fund Institutional
Shares have an investment minimum of $10 million, and are available through a
separate prospectus. Investor Shares and Institutional Shares do not have the
same expenses; as a result, the performance of these separate classes could
differ.
- --------------------------------------------------------------------------------

An Introduction to Index Funds

- ---------------------------------------------------------------------------
Fund Seeks to Track
- ---------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund The overall bond market
Vanguard Short-Term Bond Index Fund Short-term bonds
Vanguard Intermediate-Term Bond Index Fund Intermediate-term bonds
Vanguard Long-Term Bond Index Fund Long-term bonds
- ---------------------------------------------------------------------------

This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>

Fund Profile--Vanguard Total Bond Market Index Fund

The following profile summarizes key features of Vanguard Total Bond Market
Index Fund.

INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a broad, market-weighted bond index.

INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Aggregate Bond Index. This Index measures the total universe of 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:

. 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.

. 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
over a ten-year period. The table shows how the Fund's average annual returns
for one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>

- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------

[CHART APPEARS HERE]

1989 13.64%
1990 8.65%
1991 15.25%
1992 7.14%
1993 9.68%
1994 -2.66%
1995 18.18%
1996 3.58%
1997 9.44%
1998 8.58%

- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund 8.58% 7.21% 9.00%
Lehman Brothers Aggregate Bond Index 8.69 7.27 9.26
- --------------------------------------------------------------------------------

FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%

* A portfolio transaction fee of 0.18% may apply to aggregate purchases over
$250 million by a single investor.
<PAGE>

Fund Profile--Vanguard Total Bond Market Index Fund (continued)

-----------------------------------------------------------------------
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 TotBd
distributed on the first business
day of each month; capital gains Vanguard Fund Number
if any, are distributed annually 084
in December
Cusip Number
Investment Adviser 921937108
Vanguard Fixed Income Group,
Valley Forge, Pa., since inception Ticker Symbol
VBMFX
Inception Date
December 11, 1986

Net Assets as of June 30, 1999
$8.78 billion (for Investor Shares)
<PAGE>

Fund Profile--Vanguard Short-Term Bond Index Fund

The following profile summarizes key features of Vanguard Short-Term Bond Index
Fund.

INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.

INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a 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.

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 bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.

- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------

[CHART APPEARS HERE]

1995 12.88%
1996 4.55%
1997 7.04%
1998 7.63%

Fund Profile--Vanguard Short-Term Bond Index Fund (continued)

- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund 7.63% 6.48%
Lehman Brothers 1-5 Year Government/
Corporate Bond Index 7.63 6.56
- --------------------------------------------------------------------------------
* March 1, 1994.
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%

* A portfolio transaction fee of 0.15% may apply to aggregate purchases over $50
million by a single investor.

The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.

This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>

Additional Information

Dividends and Capital Gains Newspaper Abbreviation
Dividends are declared daily STBond
and distributed on the first
business day of each month; Vanguard Fund Number
capital gains, if any, are 132
distributed annually in
December Cusip Number
921937207
Investment Adviser
Vanguard Fixed Income Group, Ticker Symbol
Valley Forge, Pa., since VBISX
inception

Inception Date
March 1, 1994

Net Assets as of June 30, 1999
$937 million
<PAGE>

Fund Profile--Vanguard Intermediate-Term Bond Index Fund

The following profile summarizes key features of Vanguard Intermediate-Term Bond
Index Fund.

INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.

INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a 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 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:

. 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 returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
<PAGE>

- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------

[CHART APPEARS HERE]

1995 21.07%
1996 2.55%
1997 9.41%
1998 10.09%

- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund 10.09% 8.02%
Lehman Brothers 5-10 Year Government/Corporate
Bond Index 10.14 8.12
- --------------------------------------------------------------------------------
* March 1, 1994.
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%

* A portfolio transaction fee of 0.23% may apply to aggregate purchases over $50
million by a single investor.
<PAGE>

Fund Profile--Vanguard Intermediate-Term Bond Index Fund (continued)

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 ITBond
and distributed on the first
business day of each month; Vanguard Fund Number
capital gains, if any, are 314
distributed annually in
December Cusip Number
921937306
Investment Adviser
Vanguard Fixed Income Group, Ticker Symbol
Valley Forge, Pa., VBIIX
since inception

Inception Date
March 1, 1994

Net Assets as of June 30, 1999
$1.3 billion
<PAGE>

Fund Profile--Vanguard Long-Term Bond Index Fund

The following profile summarizes key features of Vanguard Long-Term Bond Index
Fund.

INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.

INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a 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 bonds.

. 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 returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
<PAGE>

Fund Profile--Vanguard Long-Term Bond Index Fund (continued)

- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------

[CHART]
1995 29.72%
1996 -0.26%
1997 14.30%
1998 11.96%

- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund 11.98% 9.93%
Lehman Brothers Long Government/
Corporate Bond Index 11.77 10.04
- --------------------------------------------------------------------------------
* March 1, 1994.
- --------------------------------------------------------------------------------

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.15%
12b-1 Distribution Fees: None
Other Expenses: 0.05%
Total Annual Fund Operating Expenses: 0.20%

* A portfolio transaction fee of 0.21% may apply to aggregate purchases over $10
million by a single investor.
<PAGE>

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.

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
Vanguard Fixed Income Group, Valley Forge, Pa., 921937405
since inception
Ticker Symbol
Inception Date VBLTX
March 1, 1994

Net Assets as of June 30, 1999
$275 million
<PAGE>

More on the Funds

Why invest in index funds?
Index funds appeal to many investors for a number of reasons:

. Diversification. Index funds generally invest in a diversified mix of
companies and industries.

. Low cost. Index funds 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.

. Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their benchmarks.

Indexing Methods
In seeking to track a particular index, a fund generally uses one of two methods
to select the stocks or bonds in which it invests.

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, includes more
than 7,200 bonds), funds tracking these larger indexes use a "sampling"
technique. Using sophisticated computer programs, these funds select securities
that will recreate their target indexes in terms of industry weightings, market
capitalization, and other characteristics. For instance, if 30% of the Lehman
Brothers Aggregate Bond Index were made up of mortgage-backed securities, the
Total Bond Market Index Fund would invest about 30% of its assets in
mortgage-backed securities that have similar characteristics as a group to those
in the Index. Each of the Vanguard Bond Index Funds employs this method of
indexing.

The following table shows the number of bonds held by each of the Funds as of
June 30, 1999.

- --------------------------------------------------------------------------------
Fund Number of Bonds Held Number of Bonds in Target Index
- --------------------------------------------------------------------------------
Total Bond Market 738 7,520
Short-Term Bond 235 1,745
Intermediate-Term Bond 186 1,374
Long-Term Bond 171 1,901
- --------------------------------------------------------------------------------
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 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.
<PAGE>

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 in 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 June 30, 1999, each Fund's target index was composed of the following
types of bonds:

An explanation of each type of bond follows.

. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest
payments in the meantime. The amount of interest offered depends on market
conditions and also on the financial health of the corporation issuing the
bonds; a company whose credit rating is not strong will have to offer a
higher interest rate to obtain buyers for its bonds. (Note: The Bond Index
Funds expect to invest only in investment-grade corporate bonds, which are
corporate bonds rated in one of the four highest rating categories by
independent bond-rating agencies).

. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then pay principal upon maturity,
mortgage-backed securities pay both interest and principal as part of their
regular payments. Because the mortgages underlying the securities can be
prepaid at any time by homeowners or corporate borrowers, mortgage-backed
securities are subject to prepayment risk, discussed later in this
prospectus. These types of securities are issued by a number of government
agencies, including the Government National Mortgage Association (GNMA or
"Ginnie Mae"), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Federal National Mortgage Association (FNMA or "Fannie Mae"). GNMAs are
guaranteed by the full faith and credit of the U.S. government as to the
timely payment of principal and interest; mortgage securities issued by other
government agencies or private corporations are not.
(Note: The Total Bond Market Index Fund may also invest to a lesser extent
in conventional mortgage securities, which are packaged by private
corporations and are not guaranteed by the U.S. government.)

. International dollar-denominated bonds (or yankee bonds) are bonds
denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars rather than the currency of
the issuer's country, the investor is not exposed to currency risk; rather,
the issuer assumes that risk, usually in order to attract U.S. investors.
<PAGE>

PLAIN TALK ABOUT
Bonds and Interest Rates

PLAIN TALK ABOUT
Bond Maturities

Additional Risk Information
The Funds are subject to several risks associated with investments in bonds.

[GRAPHIC] Each Fund is subject to interest rate risk, which is the possibility
that bond prices overall will decline over short or even long periods
due to rising interest rates. Interest rate risk should be low for
shorter-term bonds, moderate for intermediate-term bonds, and high for
longer-term bonds.

Changes in interest rates will affect bond income as well as bond prices.

[GRAPHIC] Each Fund is subject to income risk, which is the possibility that a
Fund's dividends (income) will decline due to falling interest rates.
Income risk is generally higher for short-term bonds and lower for
long-term bonds.

In the past, bond investors have seen the value of their investment rise and
fall--sometimes significantly--with changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.

- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
* Assuming a 7% yield.
- --------------------------------------------------------------------------------

These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or any Fund in
particular.

While falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
<PAGE>

[GRAPHIC] Because it invests in mortgage-backed securities, the Total Bond
Market Index Fund is subject to prepayment risk, which is the
possibility that during periods of falling interest rates, a homeowner
will repay a higher-yielding mortgage earlier than scheduled. Forced
to reinvest the unanticipated proceeds at lower rates, the Fund would
experience a decline in income and lose the opportunity for additional
price appreciation associated with falling rates.

With only a portion of its assets invested in mortgage-backed securities,
prepayment risk for the Total Bond Market Index Fund is moderate.

[GRAPHIC] Each Fund is subject to credit risk, which is the possibility that a
bond issuer will fail to pay interest and principal in a timely
manner.

The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, as of June 30, 1999.

- --------------------------------------------------------------------------------
Average Credit Quality
---------------------------------
Fund Fund's Holdings Target Index
- --------------------------------------------------------------------------------
Total Bond Market Aa1 Aaa
Short-Term Bond Aa1 Aaa
Intermediate-Term Bond Aa1 Aaa
Long-Term Bond Aa1 Aaa
- --------------------------------------------------------------------------------

[GRAPHIC] 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.

The Funds are generally managed without regard to tax ramifications.

To help you distinguish between the Funds and their various risks, a summary
table is provided below.

PLAIN TALK ABOUT
Credit Quality

PLAIN TALK ABOUT
The Costs of Investing

. Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.

. There is a limit on the number of times you can exchange into or out of a
Fund (see "Exchanges" in the Investing with Vanguard section).

. Each Fund reserves the right to stop offering shares at any time.

The Vanguard funds do not permit market-timing. Do not invest in these Funds
if you are a market-timer.

[GRAPHIC] The Funds may invest, to a limited extent, in derivatives.

PLAIN TALK ABOUT
Turnover Rate

movement in a futures contract may result in an immediate and substantial loss
(or gain) for a fund. The Funds will not use futures for speculative purposes or
as leveraged investments that magnify the gains or losses of an investment. The
value of all futures and options contracts in which a Fund acquires an interest
cannot exceed 20% of the Fund's total assets. The reasons for which a Fund will
invest in futures and options are:

. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.

. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.

The Funds may also invest in a relatively conservative class of
collateralized mortgage obligations (CMOs), which offer a high degree of
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 also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.

Investment Adviser

PLAIN TALK ABOUT
Derivatives

PLAIN TALK ABOUT
The Funds' Adviser

Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of December 31, 1998, the Group managed more than $127
billion in total assets.

The individuals responsible for overseeing the implementation of the Funds'
investment strategies are:

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).

PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure

The Vanguard Group is truly a 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.

Dividends, Capital Gains, and Taxes

Dividend and capital gains distributions of Fund shares that are held as an
investment option in an employer-sponsored retirement or savings plan will be
reinvested in additional Fund shares and accumulate on a tax-deferred basis. You
will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of an investment in any of the Funds
and of any plan withdrawals.

PLAIN TALK ABOUT
Distributions

Share Price

Total Assets - Liabilities
Net Asset Value = --------------------------------------
Number of Shares Outstanding

Net asset value per share for the Total Bond Market Index Fund is computed in
a similar way, by dividing the net assets attributed to each class by the number
of Fund shares outstanding for each class.

A Note on Pricing: Each Fund's investments will be priced at their market
value when market quotations are

<PAGE>

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.

Financial Highlights

PLAIN TALK ABOUT
How to Read the Financial Highlights Tables

Shareholders received $.319 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.

<PAGE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Investor Shares
Year Ended December 31,
Six Months Ended --------------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.27 $10.09 $ 9.84 $10.14 $ 9.17 $10.06
- ----------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .304 .624 .645 .640 .650 .622
Net Realized and Unrealized Gain (Loss)
on Investments (.445) .218 .250 (.300) .970 (.888)
---------------------------------------------------------------------
Total from Investment Operations (.141) .842 .895 .340 1.620 (.266)
---------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.304) (.624) (.645) (.640) (.650) (.622)
Distributions from Realized Capital Gains (.015) (.038) -- -- -- (.002)
---------------------------------------------------------------------
Total Distributions (.319) (.662) (.645) (.640) (.650) (.624)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.81 $10.27 $10.09 $ 9.84 $10.14 $ 9.17
============================================================================================================================

Total Return -1.41% 8.58% 9.44% 3.58% 18.18% -2.66%
============================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $8,787 $7,765 $5,129 $2,962 $2,405 $1,731
Ratio of Total Expenses to Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%
Ratio of Net Investment Income to
Average Net Assets 6.08%+ 6.10% 6.54% 6.54% 6.66% 6.57%
Turnover Rate 61%+ 57%* 39% 39% 36% 33%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Turnover rate excluding in-kind redemptions was 56%.
+ Annualized.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund
Year Ended December 31,
Six Months Ended ------------------------------------------ Mar. 1* to
June 30, 1999 1998 1997 1996 1995 Dec. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.10 $10.00 $ 9.92 $10.07 $ 9.50 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .263 .574 .597 .587 .623 .463
Net Realized and Unrealized Gain (Loss)
on Investments (.206) .168 .080 (.146) .570 (.500)
--------------------------------------------------------------------------------------
Total from Investment Operations .057 .742 .677 .441 1.193 (.037)
--------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.263) (.574) (.597) (.587) (.623) (.463)
Distributions from Realized Capital Gains (.034) (.068) -- (.004) -- --
--------------------------------------------------------------------------------------
Total Distributions (.297) (.642) (.597) (.591) (.623) (.463)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.86 $10.10 $10.00 $ 9.92 $10.07 $ 9.50
===================================================================================================================================

Total Return 0.57% 7.63% 7.04% 4.55% 12.88% -0.37%
===================================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $937 $709 $446 $328 $208 $77
Ratio of Total Expenses to Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to
Average Net Assets 5.33%+ 5.68% 6.03% 5.93% 6.28% 5.77%+
Turnover Rate 122%+ 112% 88% 65% 65% 53%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
+ Annualized.
<PAGE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund
Year Ended December 31,
Six Months Ended --------------------------------------------- Mar. 1* to
June 30, 1999 1998 1997 1996 1995 Dec. 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.48 $10.20 $ 9.96 $10.37 $ 9.18 $10.00
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Operations
Net Investment Income .317 .647 .661 .648 .661 .533
Net Realized and Unrealized Gain (Loss)
on Investments (.616) .353 .240 (.406) 1.217 (.820)
-------------------------------------------------------------------------------
Total from Investment Operations (.299) 1.000 .901 .242 1.878 (.287)
-------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.317) (.647) (.661) (.648) (.661) (.533)
Distributions from Realized Capital Gains (.034) (.073) -- (.004) (.027) --
-------------------------------------------------------------------------------
Total Distributions (.351) (.720) (.661) (.652) (.688) (.533)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.83 $10.48 $10.20 $ 9.96 $10.37 $ 9.18
=========================================================================================================================

Total Return -2.90% 10.09% 9.41% 2.55% 21.07% -2.88%
=========================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $1,347 $1,102 $ 687 $ 460 $ 346 $ 71
Ratio of Total Expenses to
Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to
Average Net Assets 6.30%+ 6.23% 6.64% 6.54% 6.55% 6.88%+
Turnover Rate 155%+ 77% 56% 80% 71% 63%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
+ Annualized.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund
Year Ended December 31,
Six Months Ended ------------------------------------------ Mar. 1* to
June 30, 1999 1998 1997 1996 1995 Dec. 31, 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.32 $10.78 $10.08 $10.82 $ 8.96 $10.00
- --------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .328 .666 .678 .674 .692 .586
Net Realized and Unrealized Gain (Loss)
on Investments (1.011) .588 .700 (.731) 1.884 (1.040)
------------------------------------------------------------------------------
Total from Investment Operations (.683) 1.254 1.378 (.057) 2.576 (.454)
------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.328) (.666) (.678) (.674) (.692) (.586)
Distributions from Realized Capital Gains (.019) (.048) -- (.009) (.024) --
------------------------------------------------------------------------------
Total Distributions (.347) (.714) (.678) (.683) (.716) (.586)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.29 $11.32 $10.78 $10.08 $10.82 $ 8.96
==========================================================================================================================

Total Return -6.12% 11.98% 14.30% -0.26% 29.72% -4.53%
==========================================================================================================================

Ratios/Supplemental Data
Net Assets, End of Period (Millions) $ 275 $ 210 $ 88 $ 44 $ 24 $ 9
Ratio of Total Expenses to
Average Net Assets 0.20%+ 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to
Average Net Assets 6.15%+ 6.01% 6.66% 6.75% 6.90% 7.70%+
Turnover Rate 67%+ 57% 58% 46% 45% 70%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
+ Annualized.

"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>

Investing with Vanguard

One or more of the Funds is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.

. If you have any questions about the Funds or Vanguard, including those
about a Fund's investment objective, strategies, or risks, contact
Vanguard's Participant Services Center, toll-free, at 1-800-523-1188.

. If you have questions about your account, contact your plan administrator
or the organization that provides record-keeping services for your plan.

Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.

Transactions
Contributions, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.

In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m.
Eastern time, you will receive that day's net asset value.

Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than four
substantive "round trips" through the Fund (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.

Before making an exchange to or from another fund available in your plan,
consider the following:

. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.

. Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.

. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.

Accessing Fund Information by Computer

- --------------------------------------------------------------------------------
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>