<PAGE> 1
VANGUARD
ADMIRAL FUNDS
ANNUAL REPORT 1996
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, assumed my responsibilities as Chief
Executive Officer of Vanguard Admiral Funds and the other Funds in The Vanguard
Group. Mr. Brennan will continue to serve as President of the Funds, and I will
continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
JOHN J. BRENNAN JOHN C. BOGLE
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/S/ JOHN C. BOGLE
VANGUARD ADMIRAL FUNDS CONSISTS OF FOUR PORTFOLIOS--U.S. TREASURY MONEY MARKET
PORTFOLIO, SHORT-TERM U.S. TREASURY PORTFOLIO, INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO, AND LONG-TERM U.S. TREASURY PORTFOLIO-- EACH OF WHICH INVESTS
PRIMARILY IN U.S. TREASURY SECURITIES. THE OBJECTIVE OF THE PORTFOLIOS IS TO
PROVIDE THE HIGHEST LEVEL OF CURRENT INCOME CONSISTENT WITH CAPITAL
PRESERVATION. THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN A CONSTANT NET ASSET
VALUE OF $1.00 PER SHARE.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
The bond market soared during the twelve months ended January 31, 1996,
reversing its dismal performance during our previous fiscal year, and
providing solid returns across all sectors of the market. As a result, this
Annual Report has only good news to report to the shareholders of Vanguard
Admiral Funds.
Each of our three longer-term Portfolios earned double-digit returns,
providing stellar gains of +26.7% for our Long-Term U.S. Treasury Portfolio,
+19.2% for our Intermediate-Term Portfolio, and +11.4% for our Short-Term
Portfolio. In the money market arena, interest rates remained at high levels
during the past year and our U.S. Treasury Money Market Portfolio posted a
return of +5.7%.
In every case, our tightly constructed Portfolios achieved total returns
(capital change plus reinvested dividends) that were roughly commensurate with
the sectors of the bond market that they represent. Such parallel performance
is what we expect of our Portfolios. What we did not expect was the dimension
of advantage we achieved over fixed-income mutual funds with maturity and
quality standards similar to ours. Indeed, the return of each Vanguard
Portfolio exceeded competitive norms by amounts that ranged from "substantial"
to "huge."
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
-----------------------------------
FISCAL YEAR ENDED
JANUARY 31, 1996
-----------------------------------
COMPONENTS OF
TOTAL RETURN
----------------------- SEC
U.S. TREASURY TOTAL INCOME CAPITAL ANNUALIZED
PORTFOLIO RETURN RETURN RETURN YIELD*
- -------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM +26.7% +8.1% +18.6% +6.1%
INTERMEDIATE-TERM +19.2 +7.5 +11.7 +5.6
SHORT-TERM +11.4 +6.7 + 4.7 +5.2
MONEY MARKET + 5.7 +5.7 0.0 +5.3
- -------------------------------------------------------
</TABLE>
*Yield for Money Market Portfolio is a 7-day yield. All others are 30-day
yields.
The previous table shows the total returns for our four Portfolios
during the fiscal year. To provide some perspective on just how beneficial the
falling interest rates of the past twelve months have been for fixed-income
investors, this table breaks down our total returns into their income and
capital components. The table also shows each Portfolio's current annualized
dividend yield at fiscal year end.
The detailed per share figures for each Portfolio, including net asset
values, income dividends, and any distributions from net realized capital
gains, are shown in the table on page 5 of this Report.
AN OUTSTANDING YEAR FOR THE BOND MARKET
Simply put, the bond market during the past fiscal year was just as good (very)
as the previous fiscal year was bad (also very). In fact, bond prices not only
recouped last year's lost ground, but also achieved gains that were more than
compensatory. Looking at it from the perspective of yield levels, interest
rates at the close of January 1996 had returned to levels not seen since the
close of 1993--before their quantum leap that began in February 1994.
Interest rates on long-term (30-year) U.S. Treasury bonds were at 7.8%
on January 31, 1995, and declined to 6.1% on January 31, 1996. Other
maturities followed suit: the yield on intermediate-term (10-year) U.S.
Treasury bonds fell from 7.8% to 5.6%, and the yield on short-term (3-year)
U.S. Treasury bonds fell from 7.5% to 5.0%. This table shows the components of
return for each of these three maturity classes:
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURNS
-------------------------
YIELDS AT TWELVE MONTHS ENDED
FISCAL JANUARY 31, 1996
YEAR END -------------------------
U.S. TREASURY ----------- PRICE INTEREST TOTAL
BOND MATURITY 1995 1996 INCREASE INCOME RETURN
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM 7.8% 6.1% +20.8% +7.7% +28.5%
INTERMEDIATE-
TERM 7.8 5.6 +13.0 +7.6 +20.6
SHORT-TERM 7.5 5.0 + 3.6 +7.4 +11.0
- -------------------------------------------------------
</TABLE>
(continued)
1
<PAGE> 4
[FIGURE 2]
The previous table is presented to reinforce two principal points: (1) price
volatility increases as maturity increases (last year, enhancing bond returns;
in the prior year, hampering returns); and (2) interest income is a vital
component of total return. During a bear market for bonds, income helps to
mitigate the sharp decline in bond prices; in a bull market, income provides an
important increment to bond price increases.
"THE EXPERTS SPEAK"
To say that the interest rate decline during the past twelve months was
unexpected is to understate the cautious market sentiment as the year began.
Early in January 1995, The Wall Street Journal published its regular poll of
some 50 learned economists and senior bond managers of large investment firms.
As a group, they forecast a yield of 7.6% on long-term U.S. Treasury bonds on
December 31, 1995, a decline of 20 basis points. In fact, as we now know, the
year-end yield was 6.0%, a decline of 180 basis points. The experts were also
wide of the mark--well, just plain wrong--in forecasting the yield on 90-day
U.S. Treasury bills, predicting a large rise in rates, only to see rates fall
sharply. The following table compares the yields they forecast with the actual
yields at calendar year end:
<TABLE>
<CAPTION>
- -------------------------------------------------------
YIELD AS OF
DECEMBER 31, BASIS POINT
---------------------- CHANGE IN YIELD
1994 1995 1995 ---------------
ACTUAL FORECAST ACTUAL FORECAST ACTUAL
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM U.S.
TREASURY BONDS 7.8% 7.6% 6.0% -20 -180
90-DAY U.S.
TREASURY BILLS 5.6 6.4 5.0 +80 - 60
- -------------------------------------------------------
</TABLE>
This example of failed economic forecasting is far from rare. It suggests that
bond investors should be leery of taking action on the basis of conventional
wisdom and professional qualifications.
In all, as the earlier table shows, it was a splendid year for bonds of
all maturities. In a sense, it was the culmination of a three-year period that
contains an important slice of U.S. economic history. At the outset, the low
level of short-term interest rates that prevailed from September 1992 through
January 1994 reflected an economy that was at first in recession, and then
recovered sluggishly. By February 1994, however, the economy had moved into
higher gear, and the Federal Reserve decided it was time to put on the brakes
to avoid the risk that inflation would again rear its ugly head. The Fed
intervened by raising the Federal funds rate (the short-term rate at which
banks borrow from one another) an unprecedented seven times in the 13 ensuing
months. Taken together, these increases doubled this key rate, from 3.0% in
February 1994 to 6.0% in February 1995.
This series of increases was designed to rein in a vibrant economy and
quell inflationary fears. The Fed apparently achieved its objective, as
inflation remained at low levels throughout this period. However, with the
economy again showing evidence of weakness by mid-1995, the Fed returned to the
offensive and lowered the Federal funds rate in July (to 5.75%), in December
(to 5.50%), and again in January 1996 (to 5.25%).
2
<PAGE> 5
The dramatic swings in interest rates that have marked virtually the
first six years of the 1990s, illustrated in the chart at the upper left of the
facing page, were accompanied by enormous fluctuations in the prices of
long-term Treasuries, more moderate fluctuations in the prices of
intermediate-term Treasuries, and very modest price fluctuations for short-term
issues. For example, the upward rate swing in calendar 1994 drove the prices of
long-term bonds down by -16%; the ensuing recovery in 1995 sent prices right
back up by +24%.
To mitigate the high volatility that is indigenous to long-term bonds,
investors should normally hold some bonds with intermediate-term or short-term
maturities, accepting (usually) lower yields and (always) reduced income
durability. Of course, 90-day U.S. Treasury bills are essentially devoid of
principal volatility, but only at the price of minimal yields and even lower
income durability. The Admiral Money Market Portfolio, which is composed of
short-term U.S. Treasury securities, has clearly characterized these traits
over its lifetime.
VANGUARD PORTFOLIOS' OUTSTANDING RESULTS
I am happy to report that each of the Fund's Portfolios, without exception, not
only achieved handsome total returns, but also outpaced competitive norms
during the past fiscal year. Our positive margin generally increased with the
length of the Portfolios' maturities. As this table shows, our advantage was
keen and consistent:
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURNS
----------------------------------
FISCAL YEAR ENDED
JANUARY 31, 1996
----------------------------------
AVERAGE
U.S. TREASURY VANGUARD COMPETITIVE VANGUARD
PORTFOLIO FUND FUND ADVANTAGE
- -------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM +26.7% +19.6% +7.1%
INTERMEDIATE-TERM +19.2 +15.2 +4.0
SHORT-TERM +11.4 +10.6 +0.8
MONEY MARKET + 5.7 + 5.3 +0.4
- -------------------------------------------------------
</TABLE>
As wonderful as were our relative returns during the past year, we should note
that they reflect three independent factors:
- - First, we believe that our longer-term Portfolios, while properly
placed in their maturity and quality groups, intentionally carried
somewhat longer maturities than our peers (not that our peers lack the
ability to lengthen their maturities if they wish to do so). To the
extent that our Portfolios hold longer maturities than their peers,
their net asset values may rise more when interest rates fall (as in
the past year), but decline more when interest rates rise (as in the
prior year). For the two years combined, I should note, we enjoyed a
large net advantage in each of these Portfolios.
- - Second, we gain, I believe, a significant advantage both by the
professionalism of our capable and experienced investment staff and by
our policy of maintaining our maturities within clearly defined
limits. In short, we do not make major bets on the inevitably
imponderable future course of interest rates. (A wise course,
considering the failed forecasts that I mentioned earlier in this
letter.) Nor do we accept any credit risk, since we invest soley in
securities that are backed by the full faith and credit of the U.S.
Government.
- - Third, we hold what has proved to be a durable advantage in terms of
our low costs, which has provided a strong enhancement in our relative
returns. The Portfolios incurred expense ratios (expenses as a
percentage of average net assets) of only 0.15% last year. These
costs are far below those of 0.72% for the average U.S. Treasury
mutual fund and 0.63% for the average U.S. Treasury money market
portfolio. The Vanguard advantage, other factors held equal, enhances
our returns by about 0.57% annually, equivalent to more than a 10%
increase in income in a bond portfolio which earns a gross yield of,
say, 6%. In fact, our low expenses also make it possible for money
market shareholders to earn a higher yield on our Admiral U.S.
Treasury Money
3
<PAGE> 6
Market Portfolio than on the average prime money market portfolio.
A LONGER-TERM VIEW
Suffice it to say that it is the long-term record of a fixed-income portfolio,
rather than the record in any single year, that is of the greatest significance
in evaluating performance. Although our limited history does not allow for any
substantive "long-term" analysis, the early results would suggest that the Fund
has acquitted itself quite well. The charts on pages 7 and 8 present the
long-term picture for each of our longer-term Portfolios, showing cumulative
returns since the inception of the Fund. This table summarizes the returns of
each Portfolio relative to the average return achieved by comparable
fixed-income mutual funds during the same period:
<TABLE>
<CAPTION>
- -------------------------------------------------------
ANNUAL RATE OF RETURN
----------------------------------
DECEMBER 14, 1992, TO
JANUARY 31, 1996
----------------------------------
AVERAGE ANNUAL
U.S. TREASURY VANGUARD COMPETITIVE VANGUARD
PORTFOLIO FUND FUND ADVANTAGE
- -------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM +12.0% +9.0% +3.0%
INTERMEDIATE-TERM + 9.0 +7.6 +1.4
SHORT-TERM + 6.3 +5.8 +0.5
MONEY MARKET + 4.2 +3.8 +0.4
- -------------------------------------------------------
</TABLE>
The since inception returns illustrated cover a period that was favorable on
balance for bond funds of all types, largely because of the climate of
generally declining interest rates. We do not intend to suggest that the future
absolute returns of the Portfolios will match our historical returns. Indeed,
in light of the relatively low yields available in the bond market today, there
is little reason to expect that future total returns for our long-term
Portfolios will equal those in the table. (Current money market yields, on the
other hand, are actually high relative to the range of short-term interest
rates since the Fund's inception.) However, given our advantages of
professional management, stringent maturity and quality policies, and
exceedingly low costs, we are confident that the returns of each Portfolio will
continue to be more than competitive relative to industry norms.
The charts on pages 7 and 8 also present the returns of each longer-term
Portfolio's comparable segment of the unmanaged Lehman Aggregate Bond Index. We
come extremely close to matching these bond market indexes, which represent
tough performance standards for all actively managed bond funds. The reason is
straightforward: indexes are merely "paper" portfolios, existing only in
computer-generated statistics and unencumbered by the "real world" costs of
doing business, including operating expenses, advisory fees, and portfolio
transaction costs. All mutual funds must bear these costs in their daily
activities; therefore, almost inevitably, higher cost funds must fall short of
the index returns, even if they are competently managed. (Not all are, of
course.)
As the charts show, the returns of our average competitor rarely
approach those of the indexes as closely as does Vanguard's. Our claim to fame,
as it were, is that we have nearly always outpaced other fixed-income mutual
funds holding portfolios of similar quality and maturity to ours.
IN SUMMARY
The past year has been an extraordinarily productive period for each of our
four Portfolios. It is the capstone of a splendid period in which returns on
bond portfolios were well above historical norms. This is in itself a reason
for caution. But I feel confident that investors who use the Fund's Portfolios
as they are intended to be used--as part of a balanced asset allocation
strategy--will earn long-term returns that not only parallel the returns of the
bond market segments on which they focus, but exceed the competitive norms of
other similarly situated U.S. Treasury bond portfolios.
A year ago, near the depths of the bond market plunge, I expressed to
you the thought that, with the generous current yields then available, "the
probabilities favor much better total returns in the coming year." That
prediction was something of an understatement, and we subsequently enjoyed
4
<PAGE> 7
returns that were truly outstanding. I also stated that, "virtually
unequivocally, the lowest-cost bond funds will provide higher returns than the
highest-cost bond funds." That prediction, hardly surprisingly, was right on
the mark, for that is precisely what happened during the past year.
In the coming year, we shall, of course, maintain the professional
management, credit quality ("no compromise"), and the carefully structured,
low-cost philosophy that you have every right to expect of Vanguard Admiral
Funds. In short, we shall "stay the course." A year ago, with the bond market
in a state of disarray, we urged you to stay the course as well. That proved to
be good advice then; we reiterate that advice today.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
February 27, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE TWELVE MONTHS
------------------------- ------------------------ SEC 30-DAY
U.S. TREASURY AVERAGE AVERAGE JANUARY 31, JANUARY 31, INCOME CAPITAL GAINS TOTAL ANNUALIZED
PORTFOLIO MATURITY QUALITY* 1995 1996 DIVIDENDS DISTRIBUTIONS RETURN YIELD
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM 21.5 YEARS Aaa $9.40 $11.06 $.691 $.089 +26.7% 6.05%
INTERMEDIATE-TERM 7.5 YEARS Aaa 9.58 10.70 .665 -- +19.2 5.60
SHORT-TERM 2.4 YEARS Aaa 9.77 10.23 .626 -- +11.4 5.21
MONEY MARKET 60 DAYS Aaa 1.00 1.00 .055 -- + 5.7 5.25**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Ratings provided by Moody's Investors Services. Securities receiving a Aaa
rating are judged to be of the best quality, carrying the smallest degree of
credit risk. U.S. Government and agency securities are considered to have
Aaa ratings.
**7-day yield.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED DECEMBER 31,
1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
--------------------------------------
INCEPTION TOTAL INCOME CAPITAL
U.S. TREASURY PORTFOLIO DATE 1 YEAR RETURN RETURN RETURN
----------------------- ---------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
LONG-TERM 12/14/92 +30.05% +12.37% +7.33% +5.04%
INTERMEDIATE-TERM 12/14/92 +20.55 + 8.95 +6.37 +2.58
SHORT-TERM 12/14/92 +12.27 + 6.18 +5.42 +0.76
MONEY MARKET 12/14/92 + 5.66 + 4.19 +4.19 0.00
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE ADMIRAL
U.S. TREASURY MONEY MARKET PORTFOLIO, IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
6
<PAGE> 9
CUMULATIVE PERFORMANCE
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns-Periods Ended January 31, 1996
- ----------------------------------------------------------------
1 Year Since Inception*
- ----------------------------------------------------------------
<S> <C> <C>
LONG-TERM U.S. TREASURY PORTFOLIO +26.74% +12.01%
AVERAGE LONG-TERM TREASURY FUND +19.55 + 9.03
LEHMAN LONG-TERM TREASURY INDEX +27.43 +12.06
</TABLE>
* Inception, December 14, 1992.
Note: Past performance is not predictive of future performance.
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns-Periods Ended January 31, 1996
- ---------------------------------------------------------------------
1 Year Since Inception*
- ---------------------------------------------------------------------
<S> <C> <C>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO +19.16% +8.97%
AVERAGE INTERMEDIATE-TERM TREASURY FUND +15.15 +7.61
LEHMAN INTERMEDIATE-TERM TREASURY INDEX +19.62 +9.06
</TABLE>
* Inception, December 14, 1992.
Note: Past performance is not predictive of future performance.
7
<PAGE> 10
CUMULATIVE PERFORMANCE (continued)
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns-Periods Ended January 31, 1996
- --------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------
<S> <C> <C>
SHORT-TERM U.S. TREASURY PORTFOLIO +11.41% +6.27%
AVERAGE SHORT-TERM TREASURY FUND +10.56 +5.77
LEHMAN SHORT-TERM TREASURY INDEX +12.02 +6.42
</TABLE>
* Inception, December 14, 1992.
Note: Past performance is not predictive of future performance.
8
<PAGE> 11
REPORT FROM THE INVESTMENT ADVISER
In a market more favorable to bonds than most in memory, the Vanguard Admiral
Funds produced handsome returns in the fiscal year ended January 31, 1996.
Those investors who stuck with their long-term strategy and held onto bond
investments despite the disappointing market returns of the previous year were
rewarded more quickly than many would have expected.
The returns of the various Portfolios of Vanguard Admiral Funds were
tightly correlated with their respective market segments. The Money Market
Portfolio's return was well above inflation, and the Short-Term Portfolio
received a healthy boost from capital appreciation. Since longer-maturity
holdings are more sensitive to movements in interest rates, the bulk of the
return for the Intermediate-Term and Long-Term Portfolios was attributable to
capital appreciation. Needless to say, capital gains are always welcome, but
they are at risk of reversal at any time.
In addition to strong absolute returns, each of the Portfolios
outperformed the average comparable fund with similar investment objectives.
Please refer to the Chairman's letter for a more detailed discussion of the
Portfolios' results.
In assessing the bond market, we evaluate the fundamental condition of
the economy and its impact on the demand and supply of credit. This past year
has been one of transition from a robust and probably unsustainable level of
growth that threatened to ignite inflation, to a more subdued pace marked by
production cutbacks to reduce unwanted inventory and concerns that consumers
are overextended. Figuring prominently in the slowdown were significant
increases in short-term interest rates engineered by the Federal Reserve (the
Fed) in 1994 and early 1995.
The Fed undertook its monetary tightening initiatives in an effort to
protect its hard-won progress against inflation, which in the past has often
accelerated following periods of strong economic growth. With broadbased
measures of inflation well below the 3% level, the Fed has reduced its
restrictive policy somewhat with three reductions to the Federal funds rate
(the rate at which banks borrow and lend among themselves for short periods)
over the past twelve months totaling 0.75%. There is, however, some debate as
to how much more accommodative Fed policy will become. Much of the argument
centers around the persistence of the unemployment rate at or below levels that
in the past have been associated with upward pressure on wages and the rate at
which the productivity of American workers is increasing.
Market interest rates for Treasury notes and bonds have fallen by as
much as -2.5 percentage points during the fiscal year, greatly exceeding the
decline in the money market rates engineered by the Fed. This differential rate
behavior is due to a swing in expectations since the beginning of the year,
when market participants were extremely concerned about the possibility of
higher inflation. The sluggishness exhibited by the economy and the Fed's
specific mention of lessening inflation pressures (in its switch to less
restrictive monetary policy) have greatly reduced the yield premium demanded by
investors as protection against future inflation.
In recent months, the typically cloudy view of the economy's direction
offered by regular statistical releases has been "fogged in" by several
one-time shocks. The partial shutdowns of the Federal government disrupted the
schedule of statistical sampling used to prepare the figures, thereby delaying
their release and in some cases degrading their comparability to prior periods.
In addition, the large numbers of furloughed workers and contractors whose
payroll and revenue were shut off for weeks at a time most likely had some
negative, though difficult to measure, impact on the economy. Finally,
January's "Storm of the Century" temporarily brought economic activity other
than grocery shopping to a grinding halt in a large portion of the country. The
ultimate impact of these events on the long-term performance of the U.S.
economy will be very small. However, they will make interpretation of data even
more difficult.
In managing the Portfolios, our policies are designed to ensure that the
Portfolios provide returns that closely track their respective segments of the
Treasury market, which are divided according to maturity. Within each
Portfolio's prescribed territory on the interest rate risk spectrum, we make
minor
9
<PAGE> 12
adjustments based on our fundamental outlook for the bond market and on the
results of our quantitative research. In addition, by investing a portion of
the three bond Portfolios in the securities of less well-known (but fully U.S.
Treasury guaranteed) government agencies, we add some incremental yield.
The rancorous debate in Washington over budget priorities and the need
to increase the Federal debt ceiling in order for the U.S. Treasury to meet
its obligations have recently dominated the headlines. We have considered these
events in a historical perspective and do not find them alarming. In the past,
issues over the debt ceiling and budget have caused temporary interruptions in
the Treasury's regular borrowing schedule, but they have never resulted in a
default as to timely payment of principal and interest.
The long-term record suggests that, despite political posturing to the
contrary, Congress fully understands the government's dependence on borrowed
money and the importance of an unblemished payment record to maintaining ready
and low-cost access to capital markets. At present, it is unfortunate that
some politicians have chosen to use the threat of a default as a negotiating
tool. It is our feeling that whatever short-term disturbances are experienced
in the process of increasing the debt limit, Treasury securities ultimately
will maintain their value, due to the status of the United States as the
world's largest and most creditworthy borrower.
As satisfying as the year has been, it would be unwise for investors to
extrapolate such returns into the future. A bond's interest income, which over
the long term is the primary component of total return, is now 2% lower than
where it was a year ago, on February 1, 1995. In this lower-rate environment,
expenses eat up an even greater portion of the yield of bond and money market
funds, reinforcing the benefits to our shareholders of the exceptionally low
cost of the Portfolios of Vanguard Admiral Funds. Finally, in times of low
interest rates, some investors succumb to the pressure for more income and take
on excessive risks that are unjustified by the incremental return provided. A
review of recent history uncovers a host of ill-conceived strategies that
failed miserably when changes in the market undercut their one-sided
assumptions. With our long-term focus on total return, we plan to stick with
the conservative U.S. Treasury oriented policies that have stood the test of
time.
Respectfully,
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
Vanguard Fixed Income Group
February 22, 1996
10
<PAGE> 13
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
January 31, 1996
<TABLE>
<CAPTION>
Face Market
U.S. TREASURY Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (98.1%)
- ----------------------------------------------------------------------
U.S. TREASURY BILLS
4.982%, 5/16/96 $ 3,937 $ 3,881
5.099%, 4/4/96 1,918 1,901
5.23%, 3/7/96 27,093 26,954
5.351%, 5/2/96 86,000 84,862
5.373%, 2/15/96 34,517 34,445
6.41%, 2/8/96 48,713 48,662
U.S. TREASURY NOTES
4.25%, 5/15/96 171,304 170,824
4.625%, 2/15/96 33,273 33,261
4.625%, 2/29/96 318,701 318,470
5.50%, 4/30/96 38,000 38,021
5.875%, 5/31/96 177,908 178,251
7.375%, 5/15/96 173,000 173,957
7.50%, 2/29/96 163,000 163,230
7.625%, 4/30/96 39,216 39,434
7.625%, 5/31/96 6,006 6,051
7.75%, 3/31/96 76,000 76,268
7.875%, 2/15/96 273,706 273,936
8.875%, 2/15/96 57,725 57,794
9.375%, 4/15/96 15,000 15,114
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $1,745,316) 1,745,316
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.9%)
- ----------------------------------------------------------------------
Other Assets--Note B 41,690
Liabilities (8,662)
-----------
33,028
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 1,778,296,152 outstanding
$.001 par value shares
(authorized 20,000,000,000 shares) $1,778,344
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
======================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- -----
<S> <C> <C>
PAID IN CAPITAL $1,778,296 $1.00
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED GAINS 48 --
UNREALIZED APPRECIATION
OF INVESTMENTS -- --
- ----------------------------------------------------------------------
NET ASSETS $1,778,344 $1.00
- ----------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (98.4%)
- ----------------------------------------------------------------------
U.S. TREASURY NOTES
4.375%, 11/15/96 $12,000 $ 11,942
5.125%, 6/30/98 16,700 16,750
5.25%, 7/31/98 50,000 50,281
6.125%, 7/31/96 21,000 21,108
6.75%, 6/30/99 51,000 53,566
6.875%, 10/31/96 58,000 58,780
6.875%, 8/31/99 21,000 22,158
7.75%, 11/30/99 26,500 28,844
7.75%, 12/31/99 68,000 74,109
7.75%, 1/31/00 6,000 6,545
8.00%, 10/15/96 27,000 27,540
BANAMEX EXPORT FUNDING
(U.S. Government Guaranteed)
4.91%, 10/15/98* 3,600 3,570
BANCO NACIONAL DE
COMERCIO EXTERIOR
(U.S. Government Guaranteed)
4.62%, 10/15/98* 4,865 4,817
5.10%, 4/15/98* 3,000 2,991
5.48%, 10/15/97* 1,214 1,214
6.475%, 5/15/00* 5,300 5,423
8.038%, 1/15/00* 5,589 5,894
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
4.61%, 9/1/98* 720 714
5.69%, 2/1/98* 500 502
7.75%, 1/1/00* 4,800 5,027
GUARANTEED EXPORT CERTIFICATES
(U.S. Government Guaranteed)
4.743%, 9/15/98* 5,400 5,362
6.61%, 9/15/99* 5,900 6,025
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
4.77%, 11/1/97* 3,720 3,701
4.86%, 4/1/98* 2,500 2,488
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $407,692) 419,351
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.3%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.87%, 2/1/96
(Cost $5,505) 5,505 5,505
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $413,197) 424,856
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
Other Assets--Note B $ 5,844
Liabilities (4,675)
----------
1,169
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 41,642,482 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $426,025
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.23
======================================================================
</TABLE>
+ See Note A to Financial Statements.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $420,181 $10.09
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE C (5,815) (.14)
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE D 11,659 .28
- ----------------------------------------------------------------------
NET ASSETS $426,025 $10.23
- ----------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (96.7%)
- ----------------------------------------------------------------------
U.S. TREASURY BONDS
10.375%, 11/15/12 $104,750 $144,620
10.75%, 2/15/03 5,000 6,514
10.75%, 5/15/03 13,900 18,215
11.125%, 8/15/03 6,500 8,715
11.625%, 11/15/02 27,200 36,686
11.625%, 11/15/04 12,600 17,805
11.875%, 11/15/03 5,000 6,975
U.S. TREASURY NOTES
5.75%, 8/15/03 14,400 14,609
5.875%, 3/31/99 2,000 2,047
6.25%, 2/15/03 13,900 14,539
6.50%, 4/30/99 6,000 6,250
6.75%, 4/30/00 6,000 6,344
6.875%, 8/31/99 20,500 21,631
7.25%, 5/15/04 67,514 74,961
7.25%, 8/15/04 3,000 3,337
7.50%, 11/15/01 50,207 55,557
7.75%, 12/31/99 14,000 15,258
7.75%, 1/31/00 6,000 6,545
7.875%, 11/15/04 2,000 2,312
8.875%, 2/15/99 6,000 6,633
AGENCY FOR INTERNATIONAL
DEVELOPMENT (ISRAEL)
(U.S. Government Guaranteed)
5.25%, 9/15/00 5,240 5,178
6.00%, 2/15/99 6,075 6,215
EXPORT FUNDING TRUST
(U.S. Government Guaranteed)
8.21%, 2/27/02* 9,431 10,569
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
6.00%, 3/15/05* 7,692 7,784
7.46%, 12/15/05* 13,913 14,985
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
7.39%, 6/26/06* 2,503 2,684
7.80%, 8/15/06* 9,167 10,012
8.17%, 1/15/07* 3,667 4,086
OVERSEAS PRIVATE INVESTMENT CORP.
(U.S. Government Guaranteed)
5.735%, 1/15/02* 6,000 6,030
5.94%, 6/20/06* 5,000 5,032
6.08%, 8/15/04* 22,500 22,853
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $531,381) 564,981
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.3%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.87%, 2/1/96
(Cost $13,597) 13,597 13,597
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(Cost $544,978) 578,578
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- ----------------------------------------------------------------------
Other Assets--Note B and E 17,005
Liabilities--Note E (10,898)
---------
6,107
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 54,667,645 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $584,685
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.70
======================================================================
</TABLE>
+See Note A to Financial Statements.
*The average maturity is shorter than the final maturity shown due to scheduled
interim principal payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- -------
<S> <C> <C>
PAID IN CAPITAL $561,358 $10.28
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE C (10,273) (.19)
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE D 33,600 .61
- ----------------------------------------------------------------------
NET ASSETS $584,685 $ 10.70
- ----------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
LONG-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (93.2%)
- ----------------------------------------------------------------------
U.S. TREASURY BONDS
6.25%, 8/15/23 $ 5,200 $ 5,299
7.625%, 2/15/25 1,100 1,332
7.875%, 2/15/21 66,835 81,758
8.875%, 8/15/17 23,520 31,289
8.875%, 2/15/19 25,353 33,961
10.375%, 11/15/12 14,090 19,453
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $155,466) 173,092
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (5.5%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.87%, 2/1/96
(Cost $10,283) 10,283 10,283
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (98.7%)
(Cost $165,749) 183,375
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.3%)
- ----------------------------------------------------------------------
Other Assets--Notes B and E 6,953
Liabilities--Note E (4,450)
--------
2,503
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 16,803,165 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $185,878
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.06
======================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- -------
<S> <C> <C>
PAID IN CAPITAL $167,727 $ 9.98
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED
NET REALIZED GAINS 525 .03
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE D 17,626 1.05
- ----------------------------------------------------------------------
NET ASSETS $185,878 $11.06
- ----------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. TREASURY SHORT-TERM
MONEY MARKET U.S. TREASURY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1996 January 31, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . $90,222 $24,480
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . 90,222 24,480
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . 191 45
Management and Administrative . . . . . . . . . . . 1,588 379
Marketing and Distribution . . . . . . . . . . . . . 425 102
Custodian Fees . . . . . . . . . . . . . . . . . . . . 43 8
Taxes (other than income taxes) . . . . . . . . . . . . 120 29
Auditing Fees . . . . . . . . . . . . . . . . . . . . . 7 6
Shareholders' Reports . . . . . . . . . . . . . . . . . 10 4
Annual Meeting and Proxy Costs . . . . . . . . . . . . 4 2
Directors' Fees and Expenses . . . . . . . . . . . . . 5 1
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . 2,393 576
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . 87,829 23,904
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . 73 1,729
Futures Contracts . . . . . . . . . . . . . . . . . . . -- --
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . 73 1,729
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . -- 15,462
Futures Contracts . . . . . . . . . . . . . . . . . . . -- --
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . -- 15,462
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . $87,902 $41,095
===================================================================================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1996 January 31, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . $32,856 $10,823
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 32,856 10,823
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . 55 19
Management and Administrative . . . . . . . . . . . 517 153
Marketing and Distribution . . . . . . . . . . . . . 118 35
Custodian Fees . . . . . . . . . . . . . . . . . . . . 11 9
Taxes (other than income taxes) . . . . . . . . . . . . 37 13
Auditing Fees . . . . . . . . . . . . . . . . . . . . . 6 5
Shareholders' Reports . . . . . . . . . . . . . . . . . 5 2
Annual Meeting and Proxy Costs . . . . . . . . . . . . 2 1
Directors' Fees and Expenses . . . . . . . . . . . . . 1 1
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 752 238
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 32,104 10,585
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . 5,867 4,108
Futures Contracts . . . . . . . . . . . . . . . . . . . 174 86
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . 6,041 4,194
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . 46,712 23,788
Futures Contracts . . . . . . . . . . . . . . . . . . . -- --
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . 46,712 23,788
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . $84,857 $38,567
===================================================================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. TREASURY SHORT-TERM
MONEY MARKET U.S. TREASURY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1996 January 31, 1995 JANUARY 31, 1996 January 31, 1995
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 87,829 $ 47,429 $ 23,904 $ 14,993
Realized Net Gain (Loss) . . . . . . . . 73 (30) 1,729 (7,615)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . -- -- 15,462 (4,464)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . 87,902 47,399 41,095 2,914
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . (87,829) (47,429) (23,904) (14,993)
Realized Net Gain . . . . . . . . . . . -- -- -- (540)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . (87,829) (47,429) (23,904) (15,533)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . 1,049,703 723,457 128,144 129,221
--In Lieu of Cash Distributions 82,822 44,646 18,618 11,275
--Exchange . . . . . . . . . 594,415 755,558 135,954 176,215
Redeemed --Regular . . . . . . . . . . (849,950) (673,703) (74,608) (76,545)
--Exchange . . . . . . . . . (470,113) (338,994) (132,231) (146,553)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . 406,877 510,964 75,877 93,613
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . 406,950 510,934 93,068 80,994
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . 1,371,394 860,460 332,957 251,963
- -------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . $1,778,344 $1,371,394 $426,025 $ 332,957
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . $.055 $.041 $.626 $.518
Realized Net Gain . . . . . . . . -- -- -- $.022
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . 1,644,118 1,479,015 26,346 31,046
Issued in Lieu of Cash Distributions 82,822 44,646 1,849 1,145
Redeemed . . . . . . . . . . . . . (1,320,063) (1,012,697) (20,626) (22,676)
- -------------------------------------------------------------------------------------------------------------------
406,877 510,964 7,569 9,515
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1996 January 31, 1995 JANUARY 31, 1996 January 31, 1995
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 32,104 $ 19,643 $ 10,585 $ 7,543
Realized Net Gain (Loss) . . . . . . . . 6,041 (16,319) 4,194 (2,173)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . 46,712 (15,504) 23,788 (11,139)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . 84,857 (12,180) 38,567 (5,769)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . (32,104) (19,643) (10,585) (7,543)
Realized Net Gain . . . . . . . . . . . -- (156) (1,495) (892)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . (32,104) (19,799) (12,080) (8,435)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . 160,074 114,130 53,730 35,945
--In Lieu of Cash Distributions 23,082 15,317 8,307 6,658
--Exchange . . . . . . . . . 160,777 99,514 92,081 76,760
Redeemed --Regular . . . . . . . . . . (54,841) (37,237) (36,491) (19,406)
--Exchange . . . . . . . . . (114,294) (134,759) (94,042) (49,164)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . 174,798 56,965 23,585 50,793
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . 227,551 24,986 50,072 36,589
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . 357,134 332,148 135,806 99,217
- -------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . $584,685 $ 357,134 $185,878 $135,806
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . $.665 $.598 $.691 $.670
Realized Net Gain . . . . . . . . -- $.005 $.089 $.095
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 31,613 22,065 14,158 11,890
Issued in Lieu of Cash Distributions 2,244 1,577 794 699
Redeemed . . . . . . . . . . . . . (16,469) (17,750) (12,599) (7,237)
- -------------------------------------------------------------------------------------------------------------------
17,388 5,892 2,353 5,352
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 14,
January 31, 1992, to
--------------------------- January 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00
------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .055 .041 .029 .004
Net Realized and Unrealized Gain (Loss) on Investments . . -- -- -- --
------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . .055 .041 .029 .004
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.055) (.041) (.029) (.004)
Distributions from Realized Capital Gains . . . . . . . . -- -- -- --
------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.055) (.041) (.029) (.004)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +5.66% +4.19% +2.99% +0.41%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . $1,778 $1,371 $860 $149
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .15% .15% .15% .15%*
Ratio of Net Investment Income to Average Net Assets . . . . 5.50% 4.21% 3.06% 3.12%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 14,
January 31, 1992, to
--------------------------- January 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $9.77 $10.26 $10.17 $10.00
------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .626 .518 .448 .065
Net Realized and Unrealized Gain (Loss) on Investments . . .460 (.468) .101 .170
------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 1.086 .050 .549 .235
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.626) (.518) (.448) (.065)
Distributions from Realized Capital Gains . . . . . . . . -- (.022) (.011) --
------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.626) (.540) (.459) (.065)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $10.23 $9.77 $10.26 $10.17
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +11.41% +0.57% +5.50% +2.35%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . $426 $333 $252 $63
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .15% .15% .15% .15%*
Ratio of Net Investment Income to Average Net Assets . . . . 6.22% 5.30% 4.38% 4.87%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 95% 129% 90% 7%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
19
<PAGE> 22
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 14,
January 31, 1992, to
--------------------------- January 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $9.58 $10.58 $10.29 $10.00
------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .665 .598 .578 .084
Net Realized and Unrealized Gain (Loss) on Investments . . 1.120 (.995) .418 .290
------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 1.785 (.397) .996 .374
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.665) (.598) (.578) (.084)
Distributions from Realized Capital Gains . . . . . . . . -- (.005) (.128) --
------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.665) (.603) (.706) (.084)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $10.70 $9.58 $10.58 $10.29
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +19.16% -3.67% +9.89% +3.75%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . $585 $357 $332 $78
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .15% .15% .15% .15%*
Ratio of Net Investment Income to Average Net Assets . . . . 6.49% 6.15% 5.46% 6.31%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 64% 134% 102% 0%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Long-Term U.S. Treasury Portfolio
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 14,
January 31, 1992, to
--------------------------- January 31,
For a Share Outstanding Throughout Each Period 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $9.40 $10.90 $10.30 $10.00
------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .691 .670 .709 .096
Net Realized and Unrealized Gain (Loss) on Investments . . 1.749 (1.405) .881 .300
------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 2.440 (.735) 1.590 .396
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.691) (.670) (.709) (.096)
Distributions from Realized Capital Gains . . . . . . . . (.089) (.095) (.281) --
------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.780) (.765) (.990) (.096)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $11.06 $9.40 $10.90 $10.30
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +26.74% -6.60% +15.90% +3.97%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . $186 $136 $99 $49
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .15% .15% .15% .15%*
Ratio of Net Investment Income to Average Net Assets . . . . 6.66% 7.06% 6.58% 7.22%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 125% 44% 51% 17%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard Admiral Funds is registered under the Investment Company Act of 1940
as a diversified open-end investment company and consists of the U.S. Treasury
Money Market, Short-Term U.S. Treasury, Intermediate-Term U.S. Treasury, and
Long-Term U.S. Treasury Portfolios.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: U.S. Treasury Money Market Portfolio: Securities are
stated at amortized cost which approximates market value. Other
Portfolios: Securities are valued utilizing the latest bid prices and on
the basis of a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Temporary cash investments are valued at
amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its
taxable income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
3. REPURCHASE AGREEMENTS: The Short-Term U.S. Treasury, Intermediate-Term
U.S. Treasury, and Long-Term U.S. Treasury Portfolios of the Fund, along
with other members of The Vanguard Group of Investment Companies,
transfer uninvested cash balances into a Pooled Cash Account, the daily
aggregate of which is invested in repurchase agreements secured by U.S.
Government obligations. Securities pledged as collateral for repurchase
agreements are held by a custodian bank until maturity of each
repurchase agreement. Provisions of each agreement require that the
market value of the collateral is sufficient in the event of default;
however, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject
to legal proceedings.
4. FUTURES: The Short-Term U.S. Treasury, Intermediate-Term U.S. Treasury,
and Long-Term U.S. Treasury Portfolios utilize Municipal Bond Index and
U.S. Treasury Bond futures contracts to a limited extent, with the
objectives of enhancing returns, managing interest rate risk,
maintaining liquidity, and minimizing transaction costs. The Portfolios
may purchase futures contracts instead of bonds when futures contracts
are believed to be priced more attractively than bonds. The Portfolios
may also seek to take advantage of price differences among bond market
sectors by simultaneously buying futures (or bonds) of one market sector
and selling futures (or bonds) of another sector. Futures contracts may
also be used to simulate a fully invested position in the underlying
bonds while maintaining a cash balance for liquidity.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of bonds held by
the Portfolios and the prices of futures contracts, and the possibility
of an illiquid market. Futures contracts are valued based upon their
quoted daily settlement prices. Fluctuations in the values of futures
contracts are recorded as unrealized appreciation (depreciation) until
terminated at which time realized gains (losses) are recognized.
Unrealized appreciation (depreciation) related to open futures contracts
is required to be treated as realized gain (loss) for Federal income tax
purposes.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on sales of investment securities are those of specific
securities sold. Discounts and premiums on securities purchased are
amortized to interest income over the lives of the respective
securities.
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
Dividends from net investment income are declared on a daily basis
payable on the first business day of the following month. Annual
distributions from realized gains, if any, are recorded on the
ex-dividend date.
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. At January 31, 1996, the Fund had contributed capital of $340,000 to
Vanguard (included in Other Assets), representing 1.7% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
C. During the year ended January 31, 1996, purchases and sales of U.S.
Government securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(000)
------------------------
Portfolio Purchases Sales
- -----------------------------------------------------------
<S> <C> <C>
SHORT-TERM U.S. TREASURY $369,288 $345,011
INTERMEDIATE-TERM U.S. TREASURY 472,637 290,812
LONG-TERM U.S. TREASURY 202,226 185,936
- -----------------------------------------------------------
</TABLE>
At January 31, 1996, capital loss carryforwards available to offset future net
capital gains were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Expiration Fiscal
Year(s) Ending Amount
Portfolio January 31 (000)
- -----------------------------------------------------------
<S> <C> <C>
SHORT-TERM U.S. TREASURY 2003-2004 $ 5,805
INTERMEDIATE-TERM U.S. TREASURY 2003 10,274
- -----------------------------------------------------------
</TABLE>
D. At January 31, 1996, net unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(000)
-------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- --------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM
U.S. TREASURY $11,776 $(117) $11,659
INTERMEDIATE-TERM
U.S. TREASURY 33,600 -- 33,600
LONG-TERM
U.S. TREASURY 17,626 -- 17,626
- --------------------------------------------------------
</TABLE>
E. The market value of securities on loan to broker/dealers at January 31,
1996, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(000)
-----------------------
Market
Value of Cash
Loaned Collateral
Portfolio Securities Received
- --------------------------------------------------------
<S> <C> <C>
INTERMEDIATE-TERM U.S. TREASURY $6,350 $6,465
LONG-TERM U.S. TREASURY 1,370 1,405
- --------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTS
To the Shareholders and Board of Directors
Vanguard Admiral Funds
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the U.S. Treasury Money Market, Short-Term U.S. Treasury, Intermediate-Term
U.S. Treasury and Long-Term U.S. Treasury Portfolios of Vanguard Admiral Funds
(the "Fund") at January 31, 1996, and the results of each of their operations,
the changes in each of their net assets and the financial highlights for each
of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at January 31, 1996, by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 29, 1996
23
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer President and Director
of The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.; Director of Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, CONTROLLER; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
24
<PAGE> 27
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP(R) LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q120-01/96
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 28
VANGUARD ADMIRAL FUNDS
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through five.
A line chart of the Month-End Yields (90-Day U.S. Treasury Bill, 3-Year U.S.
Treasury Note, and 30-Year U.S. Treasury Bond) for the fiscal years 1991
through 1996 appears at the top of page two.
A running head featuring an hourglass, compass, and telescope and battleships
in the background appears at the top of page six.
A line chart illustrating cumulative performance between the Long-Term U.S.
Treasury Portfolio, Lehman Long-Term U.S. Treasury Index, and Average Long-Term
U.S. Treasury Fund, average Annual Total Returns for the period December 14,
1992, to January 31, 1996 appears at the top of page seven.
A line chart illustrating cumulative performance between the Intermediate-Term
U.S. Treasury Portfolio, Lehman Intermediate-Term U.S. Treasury Index, and
Average Intermediate-Term U.S. Treasury Fund, average Annual Total Returns for
the period December 14, 1992 to January 31, 1996 appears at the bottom of page
seven.
A line chart illustrating cumulative performance between the Short-Term U.S.
Treasury Portfolio, Lehman Short-Term U.S. Treasury Index, and Average
Short-Term U.S. Treasury Fund, average Annual Total Returns for the period
December 14, 1992, to January 31, 1996 appears at the top of page eight.
A running head featuring a ships wheel and battleships in the background
appears at the top of pages nine and ten.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages eleven through twenty-three.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty-four.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
