<PAGE>
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(ART)
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PROSPECTUS--APRIL 5, 1994
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NEW ACCOUNT INFORMATION: 1-800-523-1188
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INVESTMENT Vanguard Institutional Index Fund (the "Fund") is an open-end
OBJECTIVE AND diversified investment company designed as an "index" fund.
POLICIES Designed primarily for institutional investors, the Fund's
objective is to match the investment performance of the Stan-
dard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index"), an index emphasizing large-capitalization common
stocks. There is no assurance that the Fund will achieve its
stated objective.
The Fund is a series fund organized as a business trust under
the laws of the Commonwealth of Pennsylvania. The Fund is
currently offering shares of one series.
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OPENING AN Shares of the Portfolio may be purchased by Federal Funds
ACCOUNT wire. The minimum initial investment is $10 million.
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ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation that a prospective investor should know about the Fund
before investing. It should be retained for future reference.
A "Statement of Additional Information" containing additional
information about the Fund has been filed with the Securities
and Exchange Commission. This Statement is dated April 5,
1994, and has been incorporated by reference into this Pro-
spectus. A copy may be obtained without charge by writing to
the Fund or by calling 1-800-523-1188.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses......... 2
Financial Highlights.. 2
Yield and Total
Return............... 3
FUND INFORMATION
Investment Objective.. 4
Investment Policies... 4
Investment Risks...... 4
Investor Suitability.. 5
Implementation of Pol-
icies................ 5
Investment Limita-
tions................ 8
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management and
Investment Advisory
Services............ 8
Dividends, Capital
Gains and Taxes..... 9
The Share Price of
The Fund............ 10
General Information.. 10
SHAREHOLDER GUIDE
Opening an Account
and Purchasing
Shares.............. 12
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Trade Date Policy..... 13
Selling Shares........ 13
Exchanging Shares..... 14
Exchange Privilege
Limitation........... 14
Important Information
About Telephone
Transactions......... 14
Other Account Informa-
tion................. 15
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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<PAGE>
FUND EXPENSES The following table illustrates all expenses and fees that
a shareholder of the Fund will incur. The expenses and
fees set forth in the table are for the 1993 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases............................ None
Sales Load Imposed on Reinvested Dividends................. None
Redemption Fees............................................ None
Exchange Fees.............................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------
<S> <C>
Management & Administrative Expenses....................... 0.07%
Investment Advisory Fees................................... None
12b-1 Fees................................................. None
Distribution Costs......................................... None
Other Expenses............................................. None
-----
TOTAL OPERATING EXPENSES................................. 0.07%
=====
</TABLE>
The purpose of this table is to assist you in understand-
ing the various costs and expenses that you would bear di-
rectly or indirectly as an investor in the Fund.
The following example illustrates the expenses that an in-
vestor would incur on a $1,000 investment over various pe-
riods, assuming (1) a 5% annual rate of return and (2) re-
demption at the end of each period. As noted in the table
above, the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$1 $2 $4 $9
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, have been audited by Price
Waterhouse, independent accountants, whose report thereon
was unqualified. This information should be read in con-
junction with the Fund's financial statements and notes
thereto, which are incorporated by reference in the State-
ment of Additional Information and in this Prospectus, and
which appear, along with the report of Price Waterhouse,
in the Fund's 1993 Annual Report to the Shareholders. For
a more complete discussion of the Fund's performance,
please see the Fund's 1993 Annual Report to Shareholders
which may be obtained without charge by writing to the
Fund or by calling Participant Services at 1-800-523-1188.
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------ JULY 31, 1990*
1993 1992 1991 TO DEC. 31, 1990
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<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERI-
OD................................. $41.45 $39.91 $31.62 $34.10
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.............. 1.20 1.17 1.16 .52
Net Realized and Unrealized Gain
(Loss) on Investments............. 2.92 1.79 8.35 (2.48)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERA-
TIONS.......................... 4.12 2.96 9.51 (1.96)
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DISTRIBUTIONS
Dividends from Net Investment In-
come.............................. (1.19) (1.17) (1.16) (.52)
Distributions from Realized Capital
Gains............................. (.18) (.25) (.06) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS............. (1.37) (1.42) (1.22) (.52)
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NET ASSET VALUE, END OF PERIOD...... $44.20 $41.45 $39.91 $31.62
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TOTAL RETURN........................ 10.02% 7.54% 30.34% (5.74)%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Mil-
lions)............................. $3,103 $1,525 $1,069 $512
Ratio of Expenses to Average Net As-
sets............................... .07% .07% .08% .09%**
Ratio of Net Investment Income to
Average Net Assets................. 2.72% 2.94% 3.15% 3.98%**
Portfolio Turnover Rate............. 4%+ 9%+ 4% 2%
</TABLE>
* Commencement of operations.
** Annualized.
+ The portfolio turnover rates excluding in-kind redemptions were 3% and 6%.
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YIELD AND TOTAL From time-to-time the Fund may advertise its yield and to-
RETURN tal return. Both yield and total return figures are based
on historical earnings and are not intended to indicate
future performance. The "total return" of a fund refers to
the average annual compounded rates of return over one-,
five- and ten-year periods or for the life of the fund (as
stated in the advertisement) that would equate an initial
amount invested at the beginning of a stated period to the
ending redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains distribu-
tions.
The "30-day yield" of the Fund is calculated by dividing
the net investment income per share earned during a 30-day
period by the net asset value per share on the last day of
the period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and rec-
ords, and so the advertised 30-day yield may not fully re-
flect the income paid to a shareholder's account or the
yield reported in the Fund's reports to shareholders.
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3
<PAGE>
INVESTMENT The Fund is an open-end diversified investment company de-
OBJECTIVE signed as an "index" fund. The Fund seeks to replicate the
aggregate price and yield performance, before Fund ex-
THE FUND SEEKS penses, of the Standard & Poor's 500 Composite Stock Price
TO MATCH THE Index (the "S&P 500 Index"), an unmanaged index that em-
INVESTMENT phasizes large-capitalization companies. The correlation
PERFORMANCE OF between the performance of the Fund and the Index is ex-
THE S&P 500 pected to be 0.95 or higher. A correlation of 1.00 would
INDEX indicate perfect correlation. There is no assurance that
the Fund will achieve its stated objective.
The Fund is neither sponsored by nor affiliated with Stan-
dard & Poor's Corporation.
The investment objective is fundamental and so cannot be
changed without the approval of a majority of the Fund's
shareholders.
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INVESTMENT The Fund is not managed according to traditional methods
POLICIES of "active" investment management, which involve the buy-
ing and selling of securities based upon economic, finan-
THE FUND USES A cial and market analysis, and investment judgment. In-
"PASSIVE" stead, the Fund, utilizing a "passive" or "indexing" in-
APPROACH TO vestment approach, attempts to duplicate the investment
INVEST IN COMMON performance of the S&P 500 Index by investing in all 500
STOCKS stocks in the S&P 500 Index in approximately the same pro-
portions as they are represented in the Index. The Fund is
managed without regard to tax ramifications.
The Fund attempts to remain fully invested in common
stocks. Under normal circumstances the Fund will invest at
least 95% of its assets in the common stocks of its re-
spective index and futures contracts and options. The Fund
may invest in certain short-term fixed-income securities
as cash reserves, although cash or cash equivalents are
normally expected to represent less than 1% of its assets.
The Fund may also invest up to 20% of its assets in stock
futures contracts and options in order to invest uncommit-
ted cash balances, to maintain liquidity to meet share-
holder redemptions, or to minimize trading costs. The Fund
will not invest in cash reserves, futures contracts or op-
tions as part of a temporary defensive strategy, such as
lowering its investment in common stocks to protect
against potential stock market declines. Nor may the Fund
use futures contracts or options to leverage its net as-
sets in an attempt to speculate on potential stock market
gains. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
These investment policies are not fundamental and so may
be changed by the Board of Trustees without shareholder
approval.
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INVESTMENT RISKS As a mutual fund investing in common stocks, the Fund is
subject to market risk--i.e., the possibility that common
THE FUND IS stock prices will decline over short, or even extended,
SUBJECT TO periods. The U.S. stock market tends to be cyclical, with
MARKET RISK periods when stock prices generally rise and periods when
prices generally decline.
To illustrate the volatility of stock prices, the follow-
ing table sets forth the extremes for stock market returns
as well as the average return for the period from 1926 to
1993, as measured by the Standard & Poor's 500 Composite
Stock Price Index:
4
<PAGE>
U.S. STOCK MARKET RETURNS (1926-1993)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.3 +10.3 +10.6 +10.6
</TABLE>
As shown, from 1926 to 1993, common stocks, as measured by
the S&P 500 Index, have provided an annual total return
(capital appreciation plus dividend income), on average,
of +12.3%. While this average return can be used as a
guide for setting reasonable expectations for future stock
market returns, it may not be useful for forecasting fu-
ture returns in any particular period, as stock returns
are quite volatile from year-to-year.
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INVESTOR The Fund is designed for investors who seek a low-cost
SUITABILITY "passive" or indexing approach for investing in a broadly
diversified portfolio of common stocks by seeking to rep-
THE FUND IS licate the approximate total return of the S&P 500 Index,
INTENDED FOR an index emphasizing large-capitalization stocks. Unlike
LONG-TERM other equity mutual funds, which generally seek to "beat"
"INDEX" such market averages with often unpredictable results, the
INVESTORS Fund seeks to "match" the index and thus is expected to
provide a highly predictable return relative to its bench-
mark index. The Fund is a broadly diversified equity in-
vestment.
The share price of the Fund is expected to be as volatile
as the index it replicates, and investors should be able
to tolerate sudden, sometimes substantial, fluctuations in
the value of their investment. No assurance can be given
that the Fund will achieve its stated objective or that
shareholders will be protected from the risks inherent in
equity investing.
The Fund is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term stock market movements. Invest-
ors who engage in excessive account activity generate ad-
ditional costs which are borne by all of the Fund's share-
holders. In order to minimize such costs, the Fund has
adopted the following policies. The Fund reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasona-
bly deemed to be disruptive to efficient portfolio manage-
ment, either because of the timing of the investment or
previous excessive trading by the investor. Additionally,
the Fund has adopted exchange privilege limitations as de-
scribed in the section "Exchange Privilege Limitations."
Finally, the Fund reserves the right to suspend the offer-
ing of its shares.
Investors should not consider the Fund a complete invest-
ment program, but should maintain holdings of securities
with different risk characteristics--including common
stocks, bonds and money market instruments.
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IMPLEMENTATION Vanguard Institutional Index Fund attempts to duplicate
OF POLICIES the investment results of the S&P 500 Index by holding all
500 stocks in approximately the same proportions as they
THE FUND INVESTS are represented in the S&P 500 Index. This indexing tech-
IN ALL 500 S&P nique is known as "complete replication."
STOCKS
The S&P 500 Index is composed of 500 common stocks that
are chosen by Standard & Poor's Corporation on a statisti-
cal basis. The inclusion of a stock in the S&P 500 Index
in
5
<PAGE>
no way implies that Standard & Poor's Corporation believes
the stock to be an attractive investment. The 500 securi-
ties, most of which trade on the New York Stock Exchange,
represent approximately 75% of the market value of all reg-
ularly traded U.S. common stocks. Each stock in the S&P 500
Index is weighted by its market value.
Because of the market-value weighting, the 50 largest com-
panies in the S&P 500 Index currently account for approxi-
mately 50% of the Index. Typically, companies included in
the S&P 500 Index are the largest and most dominant firms
in their respective industries. As of December 31, 1993,
the five largest companies in the Index were: General Elec-
tric (2.7%), Exxon Corporation (2.4%), AT&T (2.2%), Wal-
Mart (1.8%), and Coca Cola (1.7%). The largest industry
categories were: international oil companies (7.2%), tele-
phone companies (6.0%), electric power (4.8%), electrical
equipment (3.8%), and diversified health care companies
(3.6%).
The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's Corporation ("S&P"). S&P makes no repre-
sentation or warranty, implied or express, to the purchas-
ers of the Fund or any member of the public regarding the
advisability of investing in index funds or the ability of
the S&P 500 Index to track general stock market perfor-
mance. S&P does not guarantee the accuracy and/or the com-
pleteness of the S&P 500 Index or any data included there-
in.
S&P makes no warranty, express or implied, as to the re-
sults to be obtained by the Fund, owners of the Fund, any
person or any entity from the use of the S&P 500 or any
data included therein. S&P makes no express or implied war-
ranties and hereby expressly disclaims all such warranties
of merchantability or fitness for a particular purpose for
use with respect to the S&P 500 or any data included there-
in.
S&P's only relationship to the Fund is the licensing of the
S&P marks and the S&P 500 Index, which is determined, com-
posed and calculated by S&P without regard to the Fund.
THE FUND MAY Although it normally seeks to remain fully invested in com-
INVEST IN SHORT- mon stocks, the Fund may invest temporarily in certain
TERM FIXED- short-term fixed-income securities. Such securities may be
INCOME used to invest uncommitted cash balances or to maintain li-
SECURITIES quidity to meet shareholder redemptions. These securities
include: obligations of the United States Government and
its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and re-
purchase agreements collateralized by these securities.
THE FUND MAY USE The Fund may utilize stock futures contracts, options, and
FUTURES warrants to a limited extent. Specifically, the Fund may
CONTRACTS, enter into futures contracts and options provided that not
OPTIONS AND more than 5% of its assets are required as a margin deposit
WARRANTS, for futures contracts or options. Additionally, the Fund's
CONVERTIBLE investment in warrants will not exceed more than 5% of its
SECURITIES AND assets (2% with respect to warrants not listed on the New
SWAP AGREEMENTS York or American Stock Exchanges). Futures contracts, op-
tions, warrants, convertible securities and swap agreements
may be used for several reasons: to simulate full invest-
ment in the underlying index while retaining a cash balance
for fund management purposes; to facilitate trading; to re-
duce transaction costs; or to seek higher investment re-
turns when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively than
the underlying equity security or index. While each of
these securities can be used as leveraged investments, the
Fund may not use them to leverage its net assets.
6
<PAGE>
FUTURES The risk of loss associated with futures contracts in some
CONTRACTS, strategies can be substantial due both to the low margin
OPTIONS, deposits required and the extremely high degree of lever-
WARRANTS, age involved in futures pricing. As a result, a relatively
CONVERTIBLE small price movement in a futures contract may result in
SECURITIES AND an immediate and substantial loss or gain. However, the
SWAP AGREEMENTS Fund will not use futures contracts, options, warrants,
POSE CERTAIN convertible securities or swap agreements for speculative
RISKS purposes or to leverage its net assets. Accordingly, the
primary risks associated with the use of futures con-
tracts, options, warrants, convertible securities or swap
agreements by the Fund are: (i) imperfect correlation be-
tween the change in market value of the stocks held by a
fund and the prices of futures contracts and options; and
(ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position
will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary mar-
ket. However options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may be
less liquid than exchange traded securities. Illiquid se-
curities, in general, may not represent more than 15% of
the net assets of the Fund.
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations
thereunder, the Fund will minimize this risk by entering
into agreements that mark to market no less frequently
than quarterly. Swap agreements also bear the risk that
the Fund will not be able to meet its obligation to the
counterparty. This risk will be mitigated by investing the
Fund in the specific asset for which it is obligated to
pay a return.
THE FUND MAY The Fund may lend its investment securities on a short-
LEND ITS term or long-term basis to qualified institutional invest-
SECURITIES ors for the purpose of realizing additional income. Loans
of securities by the Fund will be collateralized by cash,
letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the
loaned securities.
PORTFOLIO Although the Fund generally seeks to invest for the long
TURNOVER RATE IS term, it retains the right to sell securities irrespective
EXPECTED TO BE of how long they have been held. However, because of the
LOW "passive" investment management approach of the Fund, the
portfolio turnover rate for the Fund is expected to be un-
der 50%, a generally lower turnover rate than for most
other investment companies. A portfolio turnover rate of
50% would occur if one half of the Fund's securities were
sold within one year. Ordinarily, securities will be sold
only to reflect certain administrative changes in the S&P
500 Index (including mergers or changes in the composition
of the index) or to accommodate cash flows into and out of
the Fund while maintaining its similarity to the S&P 500
Index.
THE FUND MAY The Fund may borrow money, subject to the limits set forth
BORROW MONEY on page 8, for temporary or emergency purposes including
the meeting of redemption requests which might otherwise
require the untimely disposition of securities.
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7
<PAGE>
INVESTMENT The Fund has adopted certain limitations on its investment
LIMITATIONS practices. Specifically, the Fund will not:
THE FUND HAS (a) with respect to 75% of its assets, purchase securities
ADOPTED CERTAIN of any issuer (except obligations of the U.S. Govern-
FUNDAMENTAL ment and its instrumentalities) if, as a result, more
LIMITATIONS than 5% of the value of the Fund's assets would be in-
vested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one indus-
try; and
(d) borrow money, except that the Fund may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes, in
an amount not exceeding 15% of the value of the Fund's
net assets (including the amount borrowed and the
value of any outstanding reverse repurchase agree-
ments) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net
assets, the Fund will not make any additional invest-
ments.
These investment limitations are considered at the time
investment securities are purchased. The limitations de-
scribed here and in the Statement of Additional Informa-
tion may be changed only with the approval of a majority
of the Fund's shareholders.
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MANAGEMENT AND The Fund currently employs The Vanguard Group, Inc. ("Van-
INVESTMENT guard") to provide management, administrative and invest-
ADVISORY ment advisory services. Vanguard provides virtually all of
SERVICES the corporate management, administrative, and distribution
services to The Vanguard Group of Investment Companies, a
VANGUARD family of 32 investment companies with 78 distinct invest-
ADMINISTERS, ment portfolios and total assets in excess of $120 bil-
DISTRIBUTES, AND lion. Vanguard also provides investment advisory services
PROVIDES to certain Vanguard Funds.
ADVISORY
SERVICES TO THE The Officers of the Fund manage its day-to-day operations
FUND and are responsible to the Fund's Board of Trustees. The
Trustees set broad policies for the Fund and choose its
Officers. A list of Trustees and Officers of the Fund and
a statement of their present positions and principal occu-
pations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and ad-
ministrative personnel needed to provide the requisite
services to the Fund and also furnishes the Fund with the
necessary office space, furnishings and equipment.
Vanguard also provides distribution and marketing services
to the Fund. The Fund is available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
The Fund receives all investment advisory services on an
at-cost basis from Vanguard's Core Management Group. The
Core Management Group manages the investment and reinvest-
ment of the Fund's assets and continuously reviews, super-
vises, and administers the Fund's investment program with
respect to those assets. The Core Management Group dis-
charges its responsibilities subject to the control of the
Officers and Directors of the Fund.
The Core Management Group also provides investment advi-
sory services to several Vanguard Funds, including Van-
guard Index Trust, Vanguard Balanced Index Fund, Vanguard
International Equity Index Fund and a portion of the as-
sets of Vanguard/Windsor II, as well as to several indexed
separate accounts. Total assets under management by the
Core Management Group were approximately $16.4 billion as
of December 31, 1993. The Fund
8
<PAGE>
is not actively managed, but is instead administered by
the Core Management Group, using computerized, quantita-
tive techniques.
In placing portfolio transactions, the Core Management
Group uses its best judgment to choose the broker most ca-
pable of providing the brokerage services necessary to ob-
tain the best available price and most favorable execution
at the lowest commission rate. The full range and quality
of brokerage services available are considered when making
these determinations. In those instances where more than
one brokerage firm can offer the services needed to obtain
the best available price and the most favorable execution,
consideration may be given to those brokers that supply
statistical information and provide other services in ad-
dition to execution services to the Fund.
Under the terms of the Service and Advisory agreement with
Vanguard, Vanguard pays all of the Fund's expenses, except
for taxes and brokerage commissions. In turn, the Fund
will pay Vanguard a fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the fol-
lowing annual percentage rates, to the average daily net
assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $500 million .09%
Next $500 million .07%
Over $1 billion .06%
</TABLE>
During the 1993 fiscal year the Fund paid Vanguard a man-
agement, investment advisory, distribution and marketing
fee which represented an effective annual rate of .07 of
1% of average (daily) net assets.
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DIVIDENDS,CAPITAL The Fund distributes substantially all of its ordinary in-
GAINSAND TAXES come in the form of quarterly dividends. Capital gains
distributions, if any, are made annually. The Fund's divi-
THE FUND PAYS dend and capital gains distributions may be reinvested in
DIVIDENDS EACH additional shares or received in cash. See "Distribution
QUARTER Options."
In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare year-end dividend and
capital gains distributions during December. Such distri-
butions, if received by shareholders by January 31, are
deemed to have been paid by the Fund and received by
shareholders on December 31 of the prior year.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary in-
come. For corporate investors, dividends from net invest-
ment income will generally qualify in part for the inter-
corporate dividends-received deduction. However, the por-
tion of the dividends so qualified depends on the aggre-
gate taxable qualifying dividend income received by a Fund
from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in addi-
tional shares, are taxable as long-term capital gains, re-
gardless of the length of time the shares have been owned.
Capital gains distributions are made when the Fund real-
izes net capital gains on sales of portfolio securities
during the year. The Fund does not seek to realize any
particular amount of capital gains during a year; rather,
realized gains are a byproduct of Fund management activi-
ties. Consequently, capital
9
<PAGE>
gains distributions may be expected to vary considerably
from year-to-year; there will be no capital gains distri-
butions in years when the Fund realizes net capital loss-
es.
Note that if capital gains distributions are received in
cash instead of reinvested in additional shares, a share-
holder's capital in the Fund will in effect be reduced.
Also, keep in mind that if shares of the Fund are pur-
chased shortly before the record date for a dividend or
capital gains distribution, a portion of the investment
will be returned as a taxable distribution, regardless of
whether distributions are being reinvested or received in
cash.
The Fund will notify shareholders annually as to the tax
status of dividend and capital gains distributions paid by
the Fund.
A CAPITAL GAIN A sale of shares of the Fund is a taxable event and may
OR LOSS MAY BE result in a capital gain or loss. A capital gain or loss
REALIZED UPON may be realized from an ordinary redemption of shares or
EXCHANGE OR an exchange of shares between two mutual funds.
REDEMPTION
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions or exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer iden-
tification regulations. This withholding requirement may
be avoided by certifying on the Account Registration Form
a proper Social Security or Taxpayer Identification Number
and by certifying that backup withholding does not apply.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- -------------------------------------------------------------------------------
THE SHARE PRICE The share price or "net asset value" per share of the Fund
OF THE FUND is determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value per share is determined once daily at the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time).
Fund securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the
valuation is made. Price information on listed securities
is taken from the exchange where the security is primarily
traded. Securities that are listed on an exchange and that
are not traded on the valuation date are valued at the
mean of the bid and asked prices. Unlisted securities for
which market quotations are readily available are valued
at the latest quoted bid price. Other assets and securi-
ties for which no current quotations are readily available
are valued at fair value as determined in good faith by
the Trustees. Securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect fair market value of such securities.
- -------------------------------------------------------------------------------
GENERAL The Fund is a Pennsylvania business trust. The Declaration
INFORMATION of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest with no par value. The
Board of Trustees has the power to designate one or more
classes ("series") of shares of beneficial interest and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering shares of one
series.
The shares are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retire-
ment or other features; and have no pre-emptive rights.
Such shares
10
<PAGE>
have non-cumulative voting rights, meaning that the hold-
ers of more than 50% of the shares voting for the election
of Trustees can elect 100% of the Trustees if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Fund if re-
quested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash are held by CoreStates Bank, Phil-
adelphia, PA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse serves as independent accountants
for the Fund and will audit its financial statements annu-
ally. The Fund is not involved in any litigation.
- -------------------------------------------------------------------------------
11
<PAGE>
SHAREHOLDER GUIDE
OPENING AN To open a new account, complete an Account Registration
ACCOUNT AND Form and mail it to:
PURCHASING
SHARES VANGUARD FINANCIAL CENTER
VANGUARD INSTITUTIONAL INDEX FUND
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
For express or registered mail, send your registration
form to: Vanguard Financial Center, Vanguard Institutional
Index Fund, Attn: Institutional Investor Services, 100
Vanguard Boulevard, Malvern, PA 19355.
Once the account has been opened, Vanguard will assign a
Service Representative for future account transactions.
Because of the risks associated with common stock invest-
ments, the Fund is intended to be a long-term investment
vehicle and is not designed to provide investors with a
means of speculating on short-term stock market movements.
Consequently, the Fund reserves the right to reject any
specific purchase (or exchange purchase) request. The Fund
also reserves the right to suspend the offering of shares
for a period of time.
Shares of the Fund may be purchased by Federal Funds wire.
The minimum initial investment for the Fund is $10 mil-
lion. Please contact your Institutional Investor Services
Representative or call Participant Services (1-800-523-
1188) to notify the Fund of the intended investment and to
receive an account number. Wiring instructions are pro-
vided below.
Subsequent investments of $5 million or more will be cred-
ited to an account on the date of purchase if Vanguard is
notified one business day in advance of the intended pur-
chase and a Federal Funds wire is received by 4:00 p.m.
(Eastern time) on the date of purchase. See "Trade Date
Policy."
ADDITIONAL Additional investments may be made at any time by wiring
INVESTMENTS monies to Vanguard. As noted above, investments of $5 mil-
Please contact lion or more require prior-day notification to qualify for
your Key Account credit on the date of purchase. To ensure prompt invest-
Representative ment, please notify your Institutional Investor Services
Representative in advance of the wire.
-----------------------------------------------------------
PURCHASING BY Monies should be wired to:
WIRE
BEFORE WIRING CORESTATES BANK, N.A.
Please contact ABA 031000011
your Key Account CORESTATES NO 0101-9897
Representative ATTN VANGUARD
VANGUARD INSTITUTIONAL INDEX FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To ensure proper receipt, please be sure to include in the
wiring instructions the complete Fund name, the account
number Vanguard has assigned you and the eight-digit
CoreStates number. NOTE: Federal Funds wire purchase or-
ders will be accepted only when the Portfolio and Custo-
dian Bank are open for business.
-----------------------------------------------------------
12
<PAGE>
PURCHASING BY Purchases may also be made by exchange from an existing
EXCHANGE (from a Vanguard Fund account. However, the Fund reserves the
Vanguard right to refuse any exchange purchase request. Please call
account) your Service Representative or call Participant Services
(1-800-523-1188.)
-----------------------------------------------------------
DISTRIBUTION Dividend and capital gains distributions paid by the Fund
OPTIONS will be automatically reinvested in additional Fund
shares. A cash dividend option is also available from the
Fund. Please contact your Service Representative for fur-
ther information.
CERTIFICATES Share certificates will not be issued for the Fund.
- -------------------------------------------------------------------------------
TRADE DATE Investments will be credited on the date of purchase under
POLICY the following conditions:
. FOR INVESTMENTS OF $5 MILLION OR MORE: The Fund must be
notified of the intended purchase by the close of the
New York Stock Exchange, (generally 4:00 p.m. Eastern
time) on the prior business day and the Federal Funds
wire must be received by Vanguard by the close of the
Exchange on the date of purchase.
. FOR INVESTMENTS OF LESS THAN $5 MILLION: The Fund must
be notified of the intended purchase by 10:45 a.m.
(Eastern time) on the day of purchase and the Federal
Funds wire must be received by the close of the Ex-
change,
Generally, if these requirements are not met, an invest-
ment will be credited to the account on the business day
following receipt of a Federal Funds wire.
The trade date, the day on which an account is credited,
is generally the day on which the Fund receives an invest-
ment in the form of Federal Funds. For purchases by Fed-
eral Funds wire or by exchange, the Fund is credited imme-
diately with Federal Funds. If a purchase by Federal Funds
wire or exchange is received by the close of the New York
Stock Exchange, (generally 4:00 p.m. Eastern time), the
trade date is the day of receipt assuming proper notifica-
tion has been given, as described above. If a purchase is
received after the close of the Exchange, the trade date
is the business day following the receipt of the wire or
exchange.
- -------------------------------------------------------------------------------
SELLING SHARES Any portion of an account may be withdrawn by contacting
your Service Representative. The redemption proceeds will
WIRE PROCEEDS be wired to the bank account indicated on the Account Reg-
istration Form five business days following receipt of a
request.
Wire redemptions of less than $5,000 are subject to a $5
charge deducted from the principal in your account. There
is no charge for wire redemptions of $5,000 or more, or
for subsequent dividend wires.
For our mutual protection, wiring instructions must be on
file at Vanguard prior to executing any redemption re-
quest. A request to change the bank account associated
with the wire redemption feature or a request to wire
funds to a bank other than that on file must be received
in writing. A signature guarantee of an authorized officer
is required if the bank registration is not identical to
the Fund account registration.
-----------------------------------------------------------
13
<PAGE>
OTHER REDEMPTION The Fund may suspend the redemption rights or postpone
INFORMATION payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Trustees determines that it would be det-
rimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay re-
demption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
The Fund reserves the right to redeem shares of any ac-
count with a balance of less than $5 million or to trans-
fer the account balance to Vanguard Index Trust-500 Port-
folio, which has the same investment objective as the
Fund. Investors will be provided with 60 days notice be-
fore any such action is taken.
- -------------------------------------------------------------------------------
EXCHANGING Shares of the Fund may be exchanged for those of other
SHARES available Vanguard Funds, but only upon prior approval by
Vanguard. Exchanges without prior Vanguard authorization
are not permitted for the Fund. Contact your Service Rep-
resentative for further information.
Exchange requests may be made in writing or by telephone.
As provided below under "Important Information About Tele-
phone Transactions," neither the Fund nor Vanguard is re-
sponsible for the authenticity of exchange instructions
received by telephone. The Fund reserves the right to re-
vise or terminate the exchange privilege and its provi-
sions, limit the amount of or reject any exchange, as
deemed necessary, at any time, without prior notice.
- -------------------------------------------------------------------------------
EXCHANGE The Fund's Exchange Privilege is not intended to afford
PRIVILEGE investors a way to speculate on short-term movements in
LIMITATION the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive ex-
change activity. Exchange activity will not be deemed ex-
cessive if limited to one substantive exchange redemption
per calendar year, taken from assets that have been in-
vested in the Fund for periods of one year or longer. The
Fund is designed for long-term investors.
- -------------------------------------------------------------------------------
IMPORTANT The ability to initiate exchanges by telephone is automat-
INFORMATION ically established on your account unless you request in
ABOUT TELEPHONE writing that telephone transactions on your account not be
TRANSACTIONS permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from unau-
thorized or fraudulent telephone instructions, Vanguard
generally adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must identify (i) the fund name; and (ii)
the 10-digit account number.
2. PAYMENT POLICY. The proceeds of any telephone redemp-
tion by wire will be made only in accordance with the
shareowner's prior written instructions.
14
<PAGE>
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by tele-
phone, provided that reasonable security procedures have
been followed. Vanguard believes that the security proce-
dures described above are reasonable and that if such pro-
cedures are followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone trans-
actions on your account. If Vanguard fails to follow rea-
sonable security procedures, it may be liable for any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- -------------------------------------------------------------------------------
OTHER ACCOUNT A current corporate resolution must be maintained on file
INFORMATION at Vanguard at all times. Any revisions to a corporate
resolution must be submitted to your Service Representa-
tive at Vanguard.
To change the registration of an account, a request must
be submitted in writing to Vanguard and include the fol-
lowing information: the account number and Fund name, au-
thorized signatures, any applicable signature guarantees,
and other supporting legal documents as necessary.
All requests should be mailed to the following address:
VANGUARD FINANCIAL CENTER
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482-1472
- -------------------------------------------------------------------------------
15
<PAGE>
(ART)
- ---------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
INSTITUTIONAL INVESTOR
SERVICES
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
PARTICIPANT SERVICES:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I094
(ART)
APRIL 5, 1994
[ LOGO OF VANGUARD APPEARS HERE ]
<PAGE>
PART B
VANGUARD INSTITUTIONAL INDEX FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 5, 1994
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus of Vanguard Institutional Index Fund (the "Fund") (dated
April 5, 1994). To obtain the Prospectus, please call:
INSTITUTIONAL INVESTOR SERVICES DEPARTMENT
1-800-523-8066
<TABLE>
<CAPTION>
PAGE
<S> <C>
TABLE OF CONTENTS
Investment Objective and Policies.......................................... B-1
Investment Limitations..................................................... B-4
Purchase of Shares......................................................... B-5
Redemption of Shares....................................................... B-6
Management and Advisory Services........................................... B-7
Portfolio Transactions..................................................... B-8
Description of Shares and Voting Rights.................................... B-8
Financial Statements....................................................... B-9
Yield & Total Return....................................................... B-10
Performance Measures....................................................... B-10
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements with commercial banks, brokers or
dealers to generate income from its excess cash balances. A repurchase agree-
ment is an agreement under which the Fund acquires a money market instrument
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, bro-
ker or dealer, subject to resale to the seller at an agreed upon price and
date (normally, the next business day). A repurchase agreement may be consid-
ered a loan collateralized by securities. The resale price reflects an agreed
upon interest rate effective for the period the instrument is held by the Fund
and is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repur-
chase agreement and are held by the Fund's custodial bank until repurchased.
In addition, the Board of Trustees will monitor the Fund's repurchase agree-
ment transactions generally and will establish guidelines and standards for
review of the creditworthiness of any bank, broker or dealer party to a repur-
chase agreement with the Fund. No more than an aggregate of 15% of the Fund's
assets, at the time of investment, will be invested in repurchase agreements
having maturities longer than seven days and securities subject to legal or
contractual restrictions on resale, or for which there are no readily avail-
able market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the under-
lying security is collateral for a loan by the Fund not within the control of
the Fund and therefore the Fund may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the
other party to the agreement. While the Fund's management acknowledges these
risks, it is expected that they can be controlled through careful monitoring
procedures.
B-1
<PAGE>
LENDING OF SECURITIES
The Fund may lend its securities on a short-term or long-term basis to quali-
fied institutional investors who need to borrow securities in order to com-
plete certain transactions, such as covering short sales, avoiding failures to
deliver securities, or completing arbitrage operations. By lending its portfo-
lio securities, the Fund attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. The Fund may lend its portfolio securi-
ties to qualified brokers, dealers, banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of such loans are
not inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with the Fund collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the
United States Government having at all times not less than 100% of the value
of the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Fund at
any time and (d) the Fund receive reasonable interest on the loan (which may
include the Fund's investing any cash collateral in interest-bearing short-
term investments), any distribution on the loaned securities and any increase
in their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of Trust-
ees.
At the present time, the Staff of the Commission does not object if an invest-
ment company pays reasonable negotiated fees in connection with loaned securi-
ties, so long as such fees are set forth in a written contract and approved by
the investment company's trustees. In addition, voting rights may pass with
the loaned securities, but if a material event will occur affecting an invest-
ment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS
The Fund may enter into futures contracts, options, and options on futures
contracts for the purpose of remaining fully invested and reducing transac-
tions costs. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts that are
standardized as to maturity date and underlying financial instrument are
traded on national futures exchanges. Futures exchanges and trading are regu-
lated under the Commodity Exchange Act by the Commodity Futures Trading Com-
mission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or accept-
ance of the underlying securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying"
a contract that has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage com-
missions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion of the contract (delivery or acceptance of the underlying security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit requirements that are higher than the exchange min-
imums. Futures contracts are customarily purchased and sold on deposits which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the con-
tract value may reduce the required
B-2
<PAGE>
margin, resulting in a repayment of excess margin to the contract holder.
Variation margin payments are made to and from the futures broker for as long
as the contract remains open. The Fund expects to earn interest income on its
margin deposists.
The Fund will only use futures contracts and options to simulate full invest-
ment in the underlying index while retaining a cash balance for Fund manage-
ment purposes.
Regulations of the CFTC applicable to the Fund require that all of its futures
transactions constitute bonafide hedging transactions. The Fund will only sell
futures contracts to protect securities it owns against price declines or pur-
chase contracts to protect against an increase in the price of securities it
intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed";
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Fund will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Fund will not enter into futures contract transactions to the extent that,
immediately thereafter, the sum of its initial margin deposits on open con-
tracts exceeds 5% of the market value of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange that pro-
vides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract
at any specific time. Thus, it may not be possible to close a futures posi-
tion. In the event of adverse price movements, the Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be disad-
vantageous to do so. In addition, the Fund may be required to make delivery of
the instruments underlying futures contracts it holds. The inability to close
options and futures positions could also have an adverse impact on the ability
to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures that are traded on national futures ex-
changes and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategy of the Fund is engaged in only for hedging purposes, the Fund's offi-
cers do not believe that the Fund is subject to the risks of loss frequently
associated with futures transactions. The Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
B-3
<PAGE>
Utilization of futures transactions by the Fund does involve the risk of im-
perfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of
a broker with whom the Fund has an open position in a futures contract or re-
lated option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
Except for transactions the Fund has identified as hedging transactions, each
Fund is required for federal income tax purposes to recognize as income for
each taxable year its net unrealized gains and losses on certain futures con-
tracts as of the end of the year as well as those actually realized during the
year. In most cases, any gain or loss recognized with respect to a futures
contract is considered to be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period of the con-
tract. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by the Fund may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
In order for the Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a tax-
able year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or
of foreign currencies as other income derived with respect to the Fund's busi-
ness of investing in securities. In addition, gains realized on the sale or
other disposition of securities held for less than three months must be lim-
ited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive
gains on securities held less than three months, the Fund may be required to
defer the closing out of futures contracts beyond the time when it would oth-
erwise be advantageous to do so. It is anticipated that unrealized gains on
futures contracts, which have been open for less than three months as of the
end of the Fund's fiscal year and which are recognized for tax purposes, will
not be considered gains on sales of securities held less than three months for
the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such dis-
tributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
INVESTMENT LIMITATIONS
Except as indicated otherwise below, the following restrictions and fundamen-
tal policies cannot be changed without approval of the holders of a majority
of the outstanding shares of the Fund (as defined in the Investment Company
Act of 1940). The Fund may not under any circumstances:
1) change its investment objective, which is to provide investment results
that correspond to the price and yield performance of publicly-traded com-
mon stocks;
B-4
<PAGE>
2) change its investment policy, which is to attempt to duplicate the perfor-
mance of Standard & Poor's 500 Composite Stock Price Index by owning as
many of the 500 stocks contained in the index as is feasible;
3) invest in commodities or purchase real estate, although it may purchase se-
curities of companies which deal in real estate or interests therein ex-
cept that the Fund may invest in stock index futures contracts, stock op-
tions and options on stock index futures contracts to that extent that not
more than 5% of the Fund's assets are required as margin deposit for such
futures contracts.
4) lend money to any person except (i) by purchasing a portion of an issue of
short-term debt securities or similar obligations (including repurchase
agreements) which are publicly distributed or customarily purchased by in-
stitutional investors, and (ii) as provided under "Lending of Securities";
5) purchase securities on margin or sell securities short except as described
above;
6) with respect to 75% of the Fund's assets, purchase more than 10% of the
outstanding voting securities of any company;
7) with respect to 75% of the Fund's assets, purchase securities of any issuer
(except obligations of the United States Government and its instrumentali-
ties), if as a result, more than 5% of the value of the Portfolio's total
assets would be invested in the securities of such issuer;
8) purchase or retain securities of an issuer if those officers and Trustees
of the Fund owning more than 1/2 of 1% of such securities together own
more than 5% of such securities*;
9) borrow money, except that the Fund may borrow from banks (or through re-
verse repurchase agreements), for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests which might other-
wise require the untimely disposition of securities, in an amount not ex-
ceeding 15% of the value of the Fund's net assets (including the amount
borrowed and the value of any outstanding reverse repurchase agreements)
at the time the borrowing is made. Whenever borrowings exceed 5% of the
value of the Fund's net assets, the Fund will not make any additional in-
vestments.
10) pledge, mortgage or hypothecate the Fund's assets to an extent greater
than 5% of its total assets;
11) invest in securities of other investment companies, except as they may be
acquired as a part of a merger, consolidation or acquisition of assets ap-
proved by the Fund's shareholders or otherwise to the extent permitted by
Section 12 of the Investment Company Act of 1940. The Fund will invest
only in investment companies which have investment objectives and policies
consistent with those of the Fund.
12) invest for the purpose of controlling management of any company;
13) engage in the business of underwriting securities issued by other persons,
except to the extent that the Fund may technically be deemed to be an un-
derwriter under the Securities Act of 1933, as amended, in disposing of
portfolio securities.
14) invest more than 5% of total assets in securities of companies which have
(with predecessors) a record of less than three years' continuous opera-
tion*;
15) invest more than 25% of the value of its total assets in any one industry;
or
16) invest in put, call, straddle or spread options or in interests in oil,
gas or other mineral exploration or development programs, except as set
forth in limitation number "3", above.
17) purchase or otherwise acquire any security if, as a result, more than 15%
of its net assets would be invested in securities that are illiquid.
* These limitations are not fundamental and therefor may be changed by the
Fund's Trustees without a shareholder vote.
These investment limitations are considered at the time investment securities
are purchased. Notwithstanding these limitations, the Fund may own all or any
portion of the securities of, or make loans to, or contribute to the costs or
other financial requirements of any company which will be wholly owned by the
Fund and one or more other investment companies and is primarily engaged in
the business of providing, at-cost, management, administrative, distribution
or related services to the Fund and other investment companies.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offer-
ings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund's shares.
B-5
<PAGE>
EXCHANGE OF SECURITIES FOR SHARES OF THE FUND. In certain circumstances,
shares of the Fund may be purchased in exchange for common stocks. Such common
stocks must be included in the appropriate Index and have a market value in
excess of $10,000. Securities accepted by the Fund will be valued as set forth
under "The Fund's Share Price" in the Fund's prospectus as of the time of the
next determination of net asset value after such acceptance. Shares of the
Fund are issued at net asset value determined as of the same time. All divi-
dends, subscription, or other rights which are reflected in the market price
of accepted securities at the time of valuation become the property of the
Fund and must be delivered to the Fund by the investor upon receipt from the
issuer. A gain or loss for Federal income tax purposes would be realized by
the investor upon the exchange depending upon the cost of the securities ten-
dered.
The Fund will not accept securities in exchange unless: (1) such securities
are, at the time of the exchange, included in the Fund; (2) such an exchange
will not cause the Fund's weightings to come imbalanced with respect to the
weightings of the stocks included in the Index; (3) the investor represents
and agrees that all securities offered to the Fund are not subject to any re-
strictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; (4) such securities are traded in an unrelated transaction with a
quoted sales price on the same day the exchange valuation is made; (5) the
quoted sales price used as a basis of valuation is representative (i.e., one
that does not involve a trade of substantial size which artificially influ-
ences the price of the security); and (6) the value of any such security being
exchanged will not exceed 5% of the Fund's net assets immediately prior to the
transaction.
Investors interested in such purchases should contact the Fund.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange Com-
mission (the "Commission"), (ii) during any period when an emergency exists as
defined by the rules of the Commission as a result of which it is not reasona-
bly practicable for the Fund to dispose of securities owned by it, or fairly
to determine the value of its assets, and (iii) for such other periods as the
Commission may permit.
No charge is made by the Fund for redemptions. Any redemption may be more or
less than the shareholder's cost depending on the market value of the securi-
ties held.
The Fund has made an election with the Commission to pay in cash all redemp-
tions requested by any shareholder of record limited in amount during any 90-
day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such committment is irrevocable without the
prior approval of the Commission. Redemptions in excess of the above limits
may be paid in whole or in part investment securities or in cash as the Fund
may deem appropriate, however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Fund. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus under "The Fund's Share Price" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
B-6
<PAGE>
MANAGEMENT AND ADVISORY SERVICES
TRUSTEES AND OFFICERS
The Officers of the Fund manage its day to day operations and are responsible
to the Fund's Trustees. The Trustees set broad policies for the Fund and
choose its Officers. The following is a list of Trustees and Officers of the
Fund and a statement of their present positions and principal occupations dur-
ing the past five years. The mailing address of the Fund's Trustees and Offi-
cers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group; Director of
The Mead Corporation and General Accident insurance.
JOHN J. BRENNAN, President & Trustee*
President and Director of The Vanguard Group, Inc., and of each of the other
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc.; Director of
Immune Response Corp. and Sun Company, Inc.; Trustee, Universal Health Realty
Income Trust.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life Insur-
ance Co.
BRUCE K. MACLAURY, Trustee
President, The Brookings Institution; Director of Dayton Hudson Corporation,
American Express Bank, Ltd., and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., Jeffrey Co. and The Southern New England Telephone Company.
ALFRED M. RANKIN, JR., Trustee
President, Chief Executive Officer and Director of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The Re-
liance Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, the Nature Conservacy; formerly, Di-
rector and Senior Partner, McKinsey & Co.; President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Director of Rohm & Haas Company; Director of Cummins Engine Com-
pany and Vanderbilt University; Trustee of the Culver Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc., and of each of the investment compa-
nies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the invest-
ment companies in The Vanguard Group.
- --------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
THE VANGUARD GROUP
The Fund currently employs The Vanguard Group, Inc. ("Vanguard") to provide
management and administrative services. Vanguard provides virtually all of the
corporate management, administrative, and distribution services of The Van-
guard Group of Investment Companies, a family of 32 investment companies with
78 distinct investment portfolios and total assets in excess of $120 billion.
Vanguard also provides investment advisory services to certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative personnel
needed to provide the requisite services to the Fund and also furnishes the
Fund with the necessary office space, furnishings and equipment.
B-7
<PAGE>
The Fund bears its own direct expenses, such as legal, auditing and Securities
Exchange Commission ("SEC") and State securities registration and custodian
fees.
Vanguard provides distribution and marketing services to the Fund. The Fund is
made available to investors on a no-load basis, without sales charges.
The Fund receives all investment advisory services from Vanguard's Core Man-
agement Group. The Core Management Group manages the investment and reinvest-
ment of the Fund's assets and continuously reviews, supervises, and adminis-
ters the Fund's investment program with respect to those assets. The Core Man-
agement Group discharges its responsibilities subject to the control of the
Officers and Trustees of the Fund.
The Core Management Group also provides investment advisory services to sev-
eral Vanguard Funds, including Vanguard Index Trust, Vanguard Balanced Index
Fund, and Vanguard International Equity Index Fund, Vanguard Variable Insur-
ance Fund--Equity Index Portfolio, and a portion of Vanguard/Windsor II, as
well as to several indexed separate accounts. Total assets under management by
the Core Management Group were approximately $16.4 billion as of December 31,
1993. The Fund is not actively managed, but is instead administered by the
Core Management Group, using computerized, quantitative techniques.
Under the terms of the service and advisory agreement Vanguard will pay all of
the Fund's expenses, except for taxes and brokerage commissions. In turn, the
Fund will pay Vanguard a fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the average daily net assets for the quarter:
<TABLE>
<CAPTION>
Net Assets Rate
---------- ----
<S> <C>
First $500 million......................................................... .09%
Next $500 million.......................................................... .07%
Over $1 billion............................................................ .06%
</TABLE>
For the years ended December 31, 1991, 1992, and 1993, the Fund paid approxi-
mately $630,000, $919,000, and $1,467,000, respectively, to Vanguard for serv-
ices rendered under the Agreement. This fee was based on a service agreement
that was different from the agreement described above. The previous agreement
required the Fund to pay Vanguard a Fee of .06% on the first $500 million of
net assets and .04% on net assets in excess of $500 million. Under the terms
of the previous agreement the Fund was responsible for all of the expenses
that are paid by Vanguard under the current agreement. For the period January
1, 1991 to May 2, 1991 all fees paid to Vanguard were based on the terms of
the previous agreement.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Fund uses its best judgment to choose
the broker most capable of providing the brokerage services necessary to ob-
tain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these deter-
minations. In those instances where it is reasonably determined that more than
one broker can offer the brokerage services needed to obtain the best avail-
able price and most favorable execution, consideration will be given to those
brokers which supply statistical information and provide other services in ad-
dition to execution services to the Fund.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified broker-
dealers who recommend the Fund to clients, and may, when a number of brokers
and dealers can provide best price and execution on a particular transaction,
consider the sale of Fund shares by a broker or dealer in selecting among bro-
ker dealers. For the years ended December 31, 1991, 1992, and 1993, the Fund
paid $184,013, $754,615, and $294,534, respectively, in brokerage commissions.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest, without par value. The Board of Trustees has
the power to designate one or more classes ("Series") of shares and
B-8
<PAGE>
to classify or reclassify any unissued shares with respect to such series.
Currently the Fund is offering shares of one series.
The shares of the Fund are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability," and have no preference as to con-
version, exchange, dividends, retirement or other features. The shares of the
Fund have no pre-emptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of share-
holders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class; except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not affect
any interest of a particular class, then only shareholders of the affected
class or classes shall be entitled to vote thereon.
The Fund will continue without limitation of time, provided however that:
(1) Subject to the majority vote of the holders of shares of the Fund out-
standing, the Trustees may sell or convert the assets of the Fund to an-
other investment company in exchange for shares of such investment com-
pany and distribute such shares ratably among the shareholders of the
Fund;
(2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and dis-
tribute such assets ratably among the shareholders of the Fund; and
(3) Without the approval of the shareholders of the Fund, unless otherwise
required by law, the Trustees may combine the assets of any two or more
Portfolios into a single Portfolio so long as such combination will not
have a material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any Portfolio as provided in paragraphs 1), 2), 3) above the Trust
shall terminate as to that Portfolio and the Trustees shall be discharged of
any and all further liabilities and duties hereunder and the right, title and
interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law, shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obliga-
tions of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of the Trust property of any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim against any share-
holder for any act or obligation of the Trust and satisfy any judgment there-
on. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the Declara-
tion of Trust protects a Trustee against any liability to which he would oth-
erwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1993, includ-
ing the financial highlights for each of the periods, appearing in the Van-
guard Institutional Index Fund 1993 Annual Report to Shareholders, and the re-
port thereon of Price Waterhouse, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional Infor-
mation. The Fund's 1993 Annual Report to Shareholders is enclosed with this
Statement of Additional Information.
B-9
<PAGE>
YIELD AND TOTAL RETURN
The average annual total return of the Fund for one year, three years and
since inception on July 31, 1990 was +10.02%, +15.53% and +11.56%, respective-
ly. The annualized yield for the thirty days ended December 31, 1993 was
+2.63%.
PERFORMANCE MEASURES
The Fund may from time to time use one or more of the following unmanaged in-
dices for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity securi-
ties, covering all stocks in the U.S. for which daily pricing is available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard & Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for convert-
ible issues of 100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORTE BOND INDEX -- consists of publicly is-
sued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND --
SHEARSON LEHMAN CORPORATE (Baa) BOND INDEX --
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND --
STANDARD & POOR'S PREFERRED INDEX --
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not in-
clude income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index, 35% Salomon Brothers High
Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that con-
tains individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities be-
tween 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a mar-
ket weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
B-10
