SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-6001) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 48
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 50
VANGUARD BOND INDEX FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
HEIDI STAM, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
ON APRIL 25, 2008 PURSUANT TO PARAGRAPH (B) OF RULE 485.
Vanguard/(R)/ Bond Index Funds
> Prospectus
Investor Shares & Admiral(TM) Shares
April 25, 2008
[Vanguard Ship Logo/R/]
Vanguard Total Bond Market Index Fund
Vanguard Short-Term Bond Index Fund
Vanguard Intermediate-Term Bond Index Fund
Vanguard Long-Term Bond Index Fund
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Contents
----------------------------------------------------------------------------------
Vanguard Fund Profiles 1 Financial Highlights 33
----------------------------------------------------------------------------------
Total Bond Market Index Fund 1 Investing With Vanguard 42
----------------------------------------------------------------------------------
Short-Term Bond Index Fund 5 Purchasing Shares 42
---------------------------------------------------------------------------------
Intermediate-Term Bond Index Fund 9 Converting Shares 45
---------------------------------------------------------------------------------
Long-Term Bond Index Fund 13 Redeeming Shares 47
---------------------------------------------------------------------------------
Investing in Index Funds 18 Exchanging Shares 50
---------------------------------------------------------------------------------
More on the Funds 19 Frequent-Trading Limits 50
---------------------------------------------------------------------------------
The Funds and Vanguard 29 Other Rules You Should Know 52
---------------------------------------------------------------------------------
Investment Advisor 29 Fund and Account Updates 56
---------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes 31 Contacting Vanguard 58
----------------------------------------------------------------------------------
Share Price 32 Glossary of Investment Terms 60
----------------------------------------------------------------------------------
|
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
This prospectus offers the Funds' Investor Shares as well as Admiral Shares for
three of the Funds. Please note that the Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
A separate prospectus offers Signal(TM) Shares of the Funds (except the
Long-Term Bond Index Fund), which are generally for Vanguard's institutional
clients who invest at least $1 million and meet other eligibility requirements.
Another prospectus offers Institutional Shares of the Funds (except the
Short-Term Bond Index Fund). Institutional Shares are generally for investors
who do not require special employee benefit plan services and who invest a
minimum of $5 million for Total Bond Market Index and $25 million for the
Intermediate and Long-Term Bond Index Funds. Another prospectus offers the
Funds' ETF Shares (available at Vanguard's website or by calling 866-499-8473).
The Funds' separate share classes have different expenses; as a result, their
investment performances will differ.
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency.
FUND PROFILE--VANGUARD TOTAL BOND MARKET INDEX FUND
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies, see
More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
. Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 8.58%
1999 -0.76
2000 11.39
2001 8.43
2002 8.26
2003 3.97
2004 4.24
2005 2.40
2006 4.27
2007 6.92
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 4.29% (quarter ended September 30, 2001), and the lowest return for
a quarter was -2.49% (quarter ended June 30, 2004).
2
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
---------------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Investor Shares
---------------------------------------------------------------------------------------------------
Return Before Taxes 6.92% 4.35% 5.71%
---------------------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.07 2.66 3.58
---------------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.45 2.72 3.57
---------------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Admiral Shares/1/
---------------------------------------------------------------------------------------------------
Return Before Taxes 7.02% 4.44% --
---------------------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees, expenses, or taxes) 6.97% 4.42% 5.97%
---------------------------------------------------------------------------------------------------
1 From the inception date of the Fund's Admiral Shares on November 12, 2001,
through December 31, 2007, the average annual total returns were 4.62% for
the Admiral Shares and 4.90% for the Lehman Brothers U.S. Aggregate Bond
Index.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns are shown only
for the Investor Shares and will differ for each share class in an amount
approximately equal to the difference in expense ratios. After-tax returns are
not relevant for a shareholder who holds fund shares in a tax-deferred account,
such as an individual retirement account or a 401(k) plan. Also, figures
captioned Return After Taxes on Distributions and Sale of Fund Shares will be
higher than other figures for the same period if a capital loss occurs upon
redemption and results in an assumed tax deduction for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in this prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
3
Shareholder Fees
(Fees paid directly from your investment)
Investor Shares Admiral Shares
-----------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None None
-----------------------------------------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/ None/1/
-----------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None None
-----------------------------------------------------------------------------------------------------------------
Redemption Fee None/2/ None/2/
-----------------------------------------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/year/3/ --
-----------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
Investor Shares Admiral Shares
-----------------------------------------------------------------------------------------------------------------
Management Expenses 0.16% 0.08%
-----------------------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None None
-----------------------------------------------------------------------------------------------------------------
Other Expenses 0.03% 0.02%
-----------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.19% 0.10%
-----------------------------------------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.18% may apply to aggregate purchases of more
than $500 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
3 If applicable, the account service fee will be collected by redeeming fund
shares in the amount of $20.
|
The following examples are intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares with the cost of investing in other
mutual funds. They illustrate the hypothetical expenses that you would incur
over various periods if you invest $10,000 in the Fund's shares. These examples
assume that the Shares provide a return of 5% a year and that operating expenses
remain the same. The results apply whether or not you redeem your investment at
the end of the given period.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Investor Shares $19 $61 $107 $243
----------------------------------------------------------
Admiral Shares 10 32 56 128
----------------------------------------------------------
|
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
4
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $55.8 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Suitable for IRAs Yes
-----------------------------------------------------------------------------------------------
Investor Shares Admiral Shares
-----------------------------------------------------------------------------------------------
Inception Date December 11, 1986 November 12, 2001
-----------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000 $100,000
-----------------------------------------------------------------------------------------------
Conversion Features May be converted to Admiral May be converted to Investor
Shares if you meet certain Shares if you are no longer
eligibility requirements eligible for Admiral Shares
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation TotBd TotBdAdml
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 84 584
-----------------------------------------------------------------------------------------------
CUSIP Number 921937108 921937603
-----------------------------------------------------------------------------------------------
Ticker Symbol VBMFX VBTLX
-----------------------------------------------------------------------------------------------
|
FUND PROFILE--VANGUARD SHORT-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 1-5 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 1 and 5 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally does not exceed 3 years and, as of December 31, 2007, was 2.7 years.
For additional information on the Fund's investment strategies, see More on the
Funds.
5
Primary Risks
The Fund is designed for investors with a low tolerance for risk, but you could
still lose money by investing in it. The Fund's performance could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be low for the Fund
because it invests mainly in short-term bonds, whose prices are much less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally high for short-term bond
funds, so investors should expect the Fund's monthly income to fluctuate.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 7.63%
1999 2.08
2000 8.84
2001 8.88
2002 6.10
2003 3.37
2004 1.70
2005 1.31
2006 4.09
2007 7.22
------------------------------------------------------------
|
6
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.89% (quarter ended September 30, 2001), and the lowest return for
a quarter was -1.80% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund Investor Shares
-----------------------------------------------------------------------------------------
Return Before Taxes 7.22% 3.52% 5.08%
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.52 2.16 3.21
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.65 2.21 3.19
-----------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund Admiral Shares(1)
-----------------------------------------------------------------------------------------
Return Before Taxes 7.31% 3.59% --
-----------------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 7.27% 3.60% 5.35%
-----------------------------------------------------------------------------------------
1 From the inception of the Fund's Admiral Shares on November 12, 2001, through
December 31, 2007, the average annual total returns were 3.74% for the
Admiral Shares and 4.07% for the Lehman Brothers 1-5 Year U.S.
Government/Credit Index.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns are shown only
for the Investor Shares and will differ for each share class in an amount
approximately equal to the difference in expense ratios. After-tax returns are
not relevant for a shareholder who holds fund shares in a tax-deferred account,
such as an individual retirement account or a 401(k) plan. Also, figures
captioned Return After Taxes on Distributions and Sale of Fund Shares will be
higher than other figures for the same period if a capital loss occurs upon
redemption and results in an assumed tax deduction for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in this prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
7
Shareholder Fees
(Fees paid directly from your investment)
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None None
------------------------------------------------------------------------------------------------
Transaction Fee on Purchases None(1) None(1)
------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None None
------------------------------------------------------------------------------------------------
Redemption Fee None(2) None(2)
------------------------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/year(3) --
------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------
Management Expenses 0.15% 0.07%
------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None None
------------------------------------------------------------------------------------------------
Other Expenses 0.03% 0.03%
------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.18% 0.10%
------------------------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.15% may apply to aggregate purchases of more
than $100 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
3 If applicable, the account service fee will be collected by redeeming fund
shares in the amount of $20.
|
The following examples are intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares with the cost of investing in other
mutual funds. They illustrate the hypothetical expenses that you would incur
over various periods if you invest $10,000 in the Fund's shares. These examples
assume that the Shares provide a return of 5% a year and that operating expenses
remain the same. The results apply whether or not you redeem your investment at
the end of the given period.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Investor Shares $18 $58 $101 $230
----------------------------------------------------------
Admiral Shares 10 32 56 128
----------------------------------------------------------
|
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
8
Additional Information
As of December 31, 2007
------------------------------------------------------------------------------------------------
Net Assets (all share classes) $6.5 billion
------------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
------------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
------------------------------------------------------------------------------------------------
Suitable for IRAs Yes
------------------------------------------------------------------------------------------------
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------
Inception Date March 1, 1994 November 12, 2001
------------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000 $100,000
------------------------------------------------------------------------------------------------
Conversion Features May be converted to Admiral May be converted to Investor
Shares if you meet eligibility Shares if you are no longer
requirements eligible for Admiral Shares
------------------------------------------------------------------------------------------------
Newspaper Abbreviation STBond STBondAdml
------------------------------------------------------------------------------------------------
Vanguard Fund Number 132 5132
------------------------------------------------------------------------------------------------
CUSIP Number 921937207 921937702
------------------------------------------------------------------------------------------------
Ticker Symbol VBISX VBIRX
------------------------------------------------------------------------------------------------
|
FUND PROFILE--VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, see More
on the Funds.
9
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 10.09%
1999 -3.00
2000 12.78
2001 9.28
2002 10.85
2003 5.65
2004 5.22
2005 1.75
2006 3.91
2007 7.61
------------------------------------------------------------
|
10
During the periods shown in the bar chart, the highest return for a calendar
quarter was 6.11% (quarter ended September 30, 1998), and the lowest return for
a quarter was -3.88% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Investor Shares
-----------------------------------------------------------------------------------------
Return Before Taxes 7.61% 4.81% 6.32%
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.78 3.00 4.08
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.90 3.06 4.04
-----------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Admiral Shares/1/
-----------------------------------------------------------------------------------------
Return Before Taxes 7.70% 4.88% --
-----------------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 7.55% 4.87% 6.50%
-----------------------------------------------------------------------------------------
1 From the inception of the Fund's Admiral Shares on November 12, 2001, through
December 31, 2007, the average annual total returns were 5.26% for the
Admiral Shares and 5.54% for the Lehman Brothers 5-10 Year U.S.
Government/Credit Index.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns are shown only
for the Investor Shares and will differ for each share class in an amount
approximately equal to the difference in expense ratios. After-tax returns are
not relevant for a shareholder who holds fund shares in a tax-deferred account,
such as an individual retirement account or a 401(k) plan. Also, figures
captioned Return After Taxes on Distributions and Sale of Fund Shares will be
higher than other figures for the same period if a capital loss occurs upon
redemption and results in an assumed tax deduction for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in this prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
11
Shareholder Fees
(Fees paid directly from your investment)
Investor Shares Admiral Shares
----------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None None
----------------------------------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/ None/1/
----------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None None
----------------------------------------------------------------------------------------------------------
Redemption Fee None/2/ None/2/
----------------------------------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/year/3/ --
----------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
Investor Shares Admiral Shares
----------------------------------------------------------------------------------------------------------
Management Expenses 0.15% 0.07%
----------------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None None
----------------------------------------------------------------------------------------------------------
Other Expenses 0.03% 0.03%
----------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.18% 0.10%
----------------------------------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.23% may apply to aggregate purchases of more
than $100 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
3 If applicable, the account service fee will be collected by redeeming fund
shares in the amount of $20.
|
The following examples are intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares with the cost of investing in other
mutual funds. They illustrate the hypothetical expenses that you would incur
over various periods if you invest $10,000 in the Fund's shares. These examples
assume that the Shares provide a return of 5% a year and that operating expenses
remain the same. The results apply whether or not you redeem your investment at
the end of the given period.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Investor Shares $18 $58 $101 $230
----------------------------------------------------------
Admiral Shares 10 32 56 128
----------------------------------------------------------
|
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
12
Additional Information
As of December 31, 2007
------------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.2 billion
------------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
------------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
------------------------------------------------------------------------------------------------
Suitable for IRAs Yes
------------------------------------------------------------------------------------------------
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------
Inception Date March 1, 1994 November 12, 2001
------------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000 $100,000
------------------------------------------------------------------------------------------------
Conversion Features May be converted to Admiral May be converted to Investor
Shares if you meet Shares if you are no longer
eligibility eligible for Admiral Shares
requiremen
ts
------------------------------------------------------------------------------------------------
Newspaper Abbreviation ITBond ITBondAdml
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Vanguard Fund Number 314 5314
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CUSIP Number 921937306 921937801
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Ticker Symbol VBIIX VBILX
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FUND PROFILE--VANGUARD LONG-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Long Government/
Credit Index. This Index includes all medium and larger issues of U.S.
government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities of greater than 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 15 and 30 years and, as of
13
December 31, 2007, was 20.6 years. For additional information on the Fund's
investment strategies, see More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be high for the Fund
because it invests mainly in long-term bonds, whose prices are much more
sensitive to interest rate changes than are the prices of short-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally low for long-term bond
funds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance
(before and after taxes) does not indicate how the Fund will perform in the
future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 11.98%
1999 -7.85
2000 16.64
2001 8.17
2002 14.35
2003 5.50
2004 8.40
2005 5.32
2006 2.67
2007 6.59
------------------------------------------------------------
|
14
During the periods shown in the bar chart, the highest return for a calendar
quarter was 9.44% (quarter ended September 30, 2002), and the lowest return for
a quarter was -5.25% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund Investor Shares
-----------------------------------------------------------------------------------------
Return Before Taxes 6.59% 5.68% 6.97%
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions 4.62 3.68 4.65
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.23 3.68 4.54
-----------------------------------------------------------------------------------------
Lehman Brothers U.S. Long Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 6.60% 5.80% 6.95%
-----------------------------------------------------------------------------------------
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
15
Shareholder Fees
(Fees paid directly from your investment)
------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
------------------------------------------------------------------------------
Redemption Fee None/2/
------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/year/3/
------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
------------------------------------------------------------------------------
Management Expenses 0.15%
------------------------------------------------------------------------------
12b-1 Distribution Fee None
------------------------------------------------------------------------------
Other Expenses 0.03%
------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.18%
------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.21% may apply to aggregate purchases of more
than $100 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
3 If applicable, the account service fee will be collected by redeeming fund
shares in the amount of $20.
|
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$18 $58 $101 $230
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
16
Additional Information
As of December 31, 2007
--------------------------------------------------------------------------------------------
Net Assets $2.8 billion
--------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
--------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
--------------------------------------------------------------------------------------------
Inception Date March 1, 1994
--------------------------------------------------------------------------------------------
Suitable for IRAs Yes
--------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000
--------------------------------------------------------------------------------------------
Newspaper Abbreviation LTBond
--------------------------------------------------------------------------------------------
Vanguard Fund Number 522
--------------------------------------------------------------------------------------------
CUSIP Number 921937405
--------------------------------------------------------------------------------------------
Ticker Symbol VBLTX
--------------------------------------------------------------------------------------------
|
17
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." An index is an unmanaged group of securities whose
overall performance is used as a standard to measure the investment performance
of a particular market. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror the performance of the target
index, for better or worse. However, an index fund does not always perform
exactly like its target index. For example, like all mutual funds, index funds
have operating expenses and transaction costs. Market indexes do not, and
therefore will usually have a slight performance advantage over funds that track
them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus dealer markups and other transaction costs--to a minimum.
18
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Each Fund's policy
of investing at least 80% of its assets in bonds that are part of the target
index may be changed only upon
60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
19
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
20
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the dollar-weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, Inc., as of December 31, 2007.
21
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
---------------------------------------------------------------
Short-Term Bond Index Aa1 Aa1
---------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
Long-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Interest Call/ Index
Income Rate Prepayment Credit Sampling
Fund Risk Risk Risk Risk Risk
-------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-------------------------------------------------------------------------------
Short-Term Bond Index High Low Low Low Low
-------------------------------------------------------------------------------
Intermediate-Term Bond Moderate Moderate Low Low Low
Index
-------------------------------------------------------------------------------
Long-Term Bond Index Low High Low Low Low
-------------------------------------------------------------------------------
|
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not
22
hold all issues in their target indexes, some of the issues (and issuers) that
are held will likely be overweighted (or underweighted) compared with the target
indexes. The maximum overweight (or underweight) is constrained at the issuer
level with the goal of producing well-diversified credit exposure in the
portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
-------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
-------------------------------------------------------------------
Short-Term Bond Index 816 1,821
-------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
-------------------------------------------------------------------
Long-Term Bond Index 777 1,083
-------------------------------------------------------------------
|
Types of bonds. The Total Bond Market Index Fund tracks the Lehman Brothers
U.S. Aggregate Bond Index; the Short-, Intermediate-, and Long-Term Bond Funds
track subsets of that Index. Lehman Brothers U.S. Aggregate Bond Index measures
the total universe of taxable investment-grade fixed income securities in the
United States--including government, corporate, and international
dollar-denominated bonds, as well as mortgage-backed and asset-backed
securities--all with maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
---------------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
---------------------------------------------------------------------------------------------------
Short-Term Bond Index 68 27 0 5 0 100
---------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 52 41 0 6 1 100
---------------------------------------------------------------------------------------------------
Long-Term Bond Index 49 46 0 5 0 100
---------------------------------------------------------------------------------------------------
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An explanation of each type of bond follows.
. U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of
23
U.S. government agencies, such as the Government National Mortgage Association
(GNMA), are backed by the full faith and credit of the U.S. government.
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
. International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In addition, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
24
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of their target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
[FLAG]
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as
25
gold), or a market index (such as the S&P 500 Index). The Funds may invest in
derivatives only if the expected risks and rewards of the derivatives are
consistent with the investment objective, policies, strategies, and risks of the
Fund as disclosed in this prospectus. The advisor will not use derivatives to
change the risks of the Fund as a whole as such risks are disclosed in this
prospectus. In particular, derivatives will be used only where they may help the
advisor:
. Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
. Add value when these instruments are attractively priced; or
. Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
Vanguard may invest a small portion of each Fund's assets in shares of bond
exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds
listed in the index or in a subset of the index. Vanguard may purchase ETFs when
doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in Vanguard bond ETFs because Fund assets invested in ETF
Shares are excluded when allocating to the Fund its share of the costs of
Vanguard operations.
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
26
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
27
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
Do not invest with Vanguard if you are a market-timer.
Plain Talk About Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
28
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
Plain Talk About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately $1 trillion in assets. Vanguard manages the Funds on an at-cost
basis, subject to the supervision and oversight of the trustees and officers of
the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond
29
funds, index bond funds, stable value portfolios, and money market funds. Since
joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the Funds
are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); managed the Intermediate-Term Bond Index Fund since its
inception (co-managed since 2008); and managed the Long-Term Bond Index Fund
since 2005 (co-managed since 2008). Education: B.S., University of Illinois;
M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; has managed the Short-Term Bond Index
Fund since 2005; and has co-managed the Total Bond Market Index and Long-Term
Bond Index Funds since 2008. Education: B.S., The Pennsylvania State University;
M.B.A., The Wharton School of the University of Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has managed
investment portfolios since 2005; and has co-managed the Intermediate-Term Bond
Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh
University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
30
DIVIDENDS, CAPITAL GAINS, AND TAXES
Fund Distributions
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; capital gains distributions generally occur
annually in December. In addition, the Funds may occasionally be required to
make supplemental distributions at some other time during the year. You can
receive distributions of income or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. Distributions declared in December--if paid to you by the end of January--are
taxable for federal income tax purposes as if received in December.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes.
. Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
. Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
. A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
31
. Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
government may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this exemption.
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
Invalid addresses. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
Tax consequences. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax advisor for detailed information about
a fund's tax consequences for you.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
32
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the periods shown, and certain information
reflects financial results for a single Fund share. The total returns in each
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report--along with each Fund's financial statements--is included in the
Funds' most recent annual report to shareholders. To receive a free copy of the
latest annual or semiannual report, you may access a report online at
www.vanguard.com, or you may contact Vanguard by telephone or by mail.
33
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's Investor Shares as
an example. The Investor Shares began fiscal year 2007 with a net asset value
(price) of $9.99 per share. During the year, each Investor Share earned
$0.501 from investment income (interest) and $0.17 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.501 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $10.16, reflecting earnings of
$0.671 per share and distributions of $0.501 per share. This was an increase
of $0.17 per share (from $9.99 at the beginning of the year to $10.16 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 6.92% for the year.
As of December 31, 2007, the Investor Shares had approximately $29.5 billion
in net assets. For the year, the expense ratio was 0.19% ($1.90 per $1,000 of
net assets), and the net investment income amounted to 5.02% of average net
assets. The Fund sold and replaced securities valued at 54% of its net
assets.
34
Total Bond Market Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.99 $10.06 $10.27 $10.31 $10.38
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .501 .485 .446 .441 .465
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .170 (.070) (.205) (.014) (.060)
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .671 .415 .241 .427 .405
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.501) (.485) (.449) (.446) (.475)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.002) (.021) --
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.501) (.485) (.451) (.467) (.475)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.16 $9.99 $10.06 $10.27 $10.31
==========================================================================================================================
Total Return(1) 6.92% 4.27% 2.40% 4.24% 3.97%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $29,532 $23,769 $21,643 $19,479 $17,032
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.19% 0.20% 0.20% 0.20% 0.22%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.02% 4.88% 4.40% 4.29% 4.46%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(2) 54% 63% 59% 59% 89%
==========================================================================================================================
1 Total returns do not include the account service fee that may be applicable
to certain accounts with balances below $10,000.
2 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
35
Total Bond Market Index Fund Admiral Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.99 $10.06 $10.27 $10.31 $10.38
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .510 .494 .455 .450 .472
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .170 (.070) (.205) (.014) (.060)
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .680 .424 .250 .436 .412
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.510) (.494) (.458) (.455) (.482)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.002) (.021) --
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.510) (.494) (.460) (.476) (.482)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.16 $9.99 $10.06 $10.27 $10.31
==========================================================================================================================
Total Return 7.02% 4.36% 2.49% 4.33% 4.04%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $10,232 $7,900 $4,529 $2,502 $2,092
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.10% 0.11% 0.11% 0.11% 0.15%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.11% 4.97% 4.49% 4.38% 4.52%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 54% 63% 59% 59% 89%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
36
Short-Term Bond Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.89 $9.92 $10.14 $10.28 $10.32
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .456 .426 .350 .303 .329
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .240 (.030) (.220) (.131) .015
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .696 .396 .130 .172 .344
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.456) (.426) (.350) (.303) (.329)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- (.009) (.055)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.456) (.426) (.350) (.312) (.384)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.13 $9.89 $9.92 $10.14 $10.28
==========================================================================================================================
Total Return(1) 7.22% 4.09% 1.31% 1.70% 3.37%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,773 $2,731 $2,951 $3,795 $3,041
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.20%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.58% 4.32% 3.50% 2.97% 3.17%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(2) 79% 106% 106% 92% 111%
==========================================================================================================================
1 Total returns do not include the account service fee that may be applicable
to certain accounts with balances below $10,000.
2 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
37
Short-Term Bond Index Fund Admiral Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.89 $9.92 $10.14 $10.28 $10.32
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .464 .433 .357 .310 .334
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .240 (.030) (.220) (.131) .015
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .704 .403 .137 .179 .349
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.464) (.433) (.357) (.310) (.334)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- (.009) (.055)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.464) (.433) (.357) (.319) (.389)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.13 $9.89 $9.92 $10.14 $10.28
==========================================================================================================================
Total Return 7.31% 4.16% 1.38% 1.77% 3.43%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,502 $2,528 $2,326 $1,469 $1,177
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.10% 0.11% 0.11% 0.10% 0.15%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.66% 4.39% 3.57% 3.05% 3.21%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 79% 106% 106% 92% 111%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
38
Intermediate-Term Bond Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.25 $10.36 $10.68 $10.69 $10.75
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .507 .499 .492 .506 .532
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .250 (.110) (.309) .038 .064
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .757 .389 .183 .544 .596
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.507) (.499) (.492) (.506) (.532)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.011) (.048) (.124)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.507) (.499) (.503) (.554) (.656)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50 $10.25 $10.36 $10.68 $10.69
==========================================================================================================================
Total Return(1) 7.61% 3.91% 1.75% 5.22% 5.65%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $3,020 $2,929 $3,009 $3,501 $2,749
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.20%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.74% 4.91% 4.68% 4.75% 4.91%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(2) 72% 86% 76% 84% 98%
==========================================================================================================================
1 Total returns do not include the account service fee that may be applicable
to certain accounts with balances below $10,000.
2 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
39
Intermediate-Term Bond Index Fund Admiral Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.25 $10.36 $10.68 $10.69 $10.75
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .515 .506 .499 .514 .538
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .250 (.110) (.309) .038 .064
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .765 .396 .190 .552 .602
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.515) (.506) (.499) (.514) (.538)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.011) (.048) (.124)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.515) (.506) (.510) (.562) (.662)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50 $10.25 $10.36 $10.68 $10.69
==========================================================================================================================
Total Return 7.70% 3.98% 1.82% 5.30% 5.70%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,308 $3,118 $2,949 $1,127 $756
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.10% 0.11% 0.11% 0.11% 0.15%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.82% 4.98% 4.75% 4.82% 4.96%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 72% 86% 76% 84% 98%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
40
Long-Term Bond Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.53 $11.84 $11.82 $11.50 $11.67
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .613 .603 .601 .617 .627
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .120 (.310) .020 .320 .004
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .733 .293 .621 .937 .631
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.613) (.603) (.601) (.617) (.627)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- (.174)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.613) (.603) (.601) (.617) (.801)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.65 $11.53 $11.84 $11.82 $11.50
==========================================================================================================================
Total Return(1) 6.59% 2.67% 5.32% 8.40% 5.50%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,277 $1,898 $1,893 $1,310 $951
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.20%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.34% 5.30% 5.03% 5.34% 5.34%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(2) 62% 55% 52% 62% 76%
==========================================================================================================================
1 Total returns do not include the account service fee that may be applicable
to certain accounts with balances below $10,000.
2 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
41
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
Each fund you hold in an account is a separate "fund account." For example, if
you hold three funds in a nonretirement account titled in your own name, two
funds in a nonretirement account titled jointly with your spouse, and one fund
in an individual retirement account, you have six fund accounts--and this is
true even if you hold the same fund in multiple accounts.
Purchasing Shares
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Investor Shares
To open and maintain an account. $3,000.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
Account Minimums for Admiral Shares
To open and maintain an account. $100,000 for new investors. Shareholders who
are registered on Vanguard.com, have held shares of the Fund for ten years, and
have $50,000 or more in the same Fund account are eligible to convert their
Investor Shares to Admiral Shares. See Converting Shares. Institutional clients
should contact Vanguard for information on special rules that may apply to them.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
How to Initiate a Purchase Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your purchase request.
Online. You may open certain types of accounts, request an electronic bank
transfer, and make an exchange (using the proceeds from the redemption of shares
from one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund) through our website at www.vanguard.com if you are a registered user.
42
By telephone. You may call Vanguard to begin the account registration process
or request that the account-opening forms be sent to you. You may also request a
purchase of shares by wire, by electronic bank transfer, or by an exchange. See
Contacting Vanguard.
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. For a list of Vanguard
addresses, see Contacting Vanguard.
Transaction Fee on Purchases
The Funds reserve the right to charge a transaction fee to investors whose
aggregate share purchases equal or exceed the following amounts:
. Total Bond Market Index Fund--$500 million
. Short-Term Bond Index Fund--$100 million
. Intermediate-Term Bond Index Fund--$100 million
. Long-Term Bond Index Fund--$100 million
How to Pay For a Purchase
By electronic bank transfer. You may purchase shares of a Vanguard fund through
an electronic transfer of money held in a designated bank account. To establish
the electronic bank transfer option on an account, you must designate a bank
account online, complete a special form, or fill out the appropriate section of
your account registration form. After the option is set up on your account, you
can purchase shares by electronic bank transfer on a regular schedule (Automatic
Investment Plan) or whenever you wish. Your purchase request can be initiated
online, by telephone, or by mail.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. See
Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Initiate a Purchase Request: By mail. Make your
check payable to Vanguard and include the appropriate fund number (e.g.,
Vanguard--xx). For a list of Fund numbers (for Funds and share classes in this
prospectus), see Contacting Vanguard.
By exchange. You may purchase shares of a Vanguard fund using the proceeds from
the simultaneous redemption of shares from another Vanguard fund. You may
initiate an exchange online (if you are a registered user of Vanguard.com), by
telephone, or by mail. See Exchanging Shares.
43
Trade Date
The trade date for any purchase request received in good order will depend on
the day and time Vanguard receives your request, the manner in which you are
paying, and the type of fund you are purchasing. Your purchase will be executed
using the NAV as calculated on the trade date. NAVs are calculated only
on days the New York Stock Exchange (NYSE) is open for trading (a business day).
For purchases by check into all funds other than money market funds, and for
purchases by exchange or wire into all funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the purchase request is received on a business day after the close of regular
trading on the NYSE, or on a nonbusiness day, the trade date will be the next
business day.
For purchases by check into money market funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the next
business day. If the purchase request is received on a business day after the
close of regular trading on the NYSE, or on a nonbusiness day, the trade date
will be the second business day following the day Vanguard receives the purchase
request. Because money market instruments must be purchased with federal funds
and it takes a money market mutual fund one business day to convert check
proceeds into federal funds, the trade date will be one business day later than
for other funds.
For purchases by electronic bank transfer using an Automatic Investment Plan:
Your trade date generally will be one business day before the date you
designated for withdrawal from your bank account.
For purchases by electronic bank transfer not using an Automatic Investment
Plan: If the purchase request is received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the next business day. If the
purchase request is received on a business day after 10 p.m., Eastern time, or
on a nonbusiness day, the trade date will be the second business day following
the day Vanguard receives the request.
If your purchase request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Earning Dividends
You begin earning dividends on the business day following your trade date. When
buying money market fund shares through a federal funds wire, however, you can
begin earning dividends immediately by making a purchase request by telephone to
44
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund).
Other Purchase Rules You Should Know
Admiral Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Vanguard will not accept your request to cancel any purchase
request once processing has begun. Please be careful when placing a purchase
request.
Converting Shares
When a conversion occurs, you receive shares of one class in place of shares of
another class of the same fund. At the time of conversion, the dollar value of
the "new" shares you receive equals the dollar value of the "old" shares that
were converted. In other words, the conversion has no effect on the value of
your investment in the fund. However, the number of shares you own after the
conversion may be greater than or less than the number of shares you owned
before the conversion, depending on the net asset values of the two share
classes.
45
A conversion between share classes of the same fund is a nontaxable event.
Trade Date
The trade date for any conversion request received in good order will depend on
the day and time Vanguard receives your request. Your conversion will be
executed using the NAV of the different share classes on the trade date. NAVs
are calculated only on days the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close
of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day. For a conversion request received on a business day after
the close of regular trading on the NYSE, or on a nonbusiness day, the trade
date will be the next business day. See Other Rules You Should Know.
Conversions From Investor Shares to Admiral Shares
Self-directed conversions. If your account balance in the Fund is at least
$100,000, you may ask Vanguard to convert your Investor Shares to Admiral
Shares. You can make conversion requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Contacting Vanguard.
Automatic conversions. Vanguard conducts periodic reviews of account balances
and may, if your account balance in the Fund exceeds $100,000, automatically
convert your Investor Shares to Admiral Shares. You will be notified before an
automatic conversion occurs and will have an opportunity to instruct Vanguard
not to effect the conversion.
Tenure conversions. You are eligible for a tenure conversion from Investor
Shares to Admiral Shares if you have had an account in the Fund for ten years,
that account balance is at least $50,000, and you are registered with
Vanguard.com. You may request a tenure conversion online, by telephone, or by
mail.
Conversions to Institutional Shares
You are eligible for a self-directed conversion from Investor Shares or Admiral
Shares to Institutional Shares of the same Fund, provided that your account
balance in the Fund is at least $5 million for Total Bond Market Index Fund or
$25 million for Intermediate-Term or Long-Term Bond Index Funds. Registered
users of our website, www. vanguard.com, may request a conversion online, or you
may contact Vanguard by telephone or by mail to request this transaction.
Accounts that qualify for Institutional Shares will not be automatically
converted.
Mandatory Conversions to Another Share Class
If an account no longer meets the balance requirements for a share class,
Vanguard may automatically convert the shares in the account to another share
class, as
46
appropriate. A decline in the account balance because of market movement may
result in such a conversion. Vanguard will notify the investor in writing before
any mandatory conversion occurs.
Redeeming Shares
How to Initiate a Redemption Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your redemption request.
Online. You may redeem shares, request an electronic bank transfer, and make an
exchange (the purchase of shares of one Vanguard fund using the proceeds of a
simultaneous redemption from another Vanguard fund) through our website at
www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. See Contacting Vanguard.
By writing a check. If you've established the checkwriting service on your
account, you can redeem shares by writing a check for $250 or more.
How to Receive Redemption Proceeds
By electronic bank transfer. You may have the proceeds of a fund redemption
sent directly to a designated bank account. To establish the electronic bank
transfer option, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can redeem shares by electronic
bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or
whenever you wish ($100 minimum). Your transaction can be initiated online, by
telephone, or by mail.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
By exchange. You may have the proceeds of a Vanguard fund redemption invested
directly in shares of another Vanguard fund. You may initiate an exchange online
(if you are a registered user of Vanguard.com), by telephone, or by mail.
47
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
The trade date for any redemption request received in good order will depend on
the day and time Vanguard receives your request and the manner in which you are
redeeming. Your redemption will be executed using the NAV as calculated
on the trade date. NAVs are calculated only on days that the NYSE is open for
trading (a business day).
For redemptions by check, exchange, or wire: If the redemption request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the redemption request is received on a business day after the close of
regular trading on the NYSE, or on a nonbusiness day, the trade date will be the
next business day.
. Note on timing of wire redemptions from money market funds: For telephone
requests received by Vanguard on a business day before 10:45 a.m., Eastern
time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the
redemption proceeds will leave Vanguard by the close of business the same day.
For telephone requests received by Vanguard on a business day after those
cut-off times, or on a nonbusiness day, and for all requests other than by
telephone, the redemption proceeds will leave Vanguard by the close of
business on the next business day.
. Note on timing of wire redemptions from bond funds: For requests received by
Vanguard on a business day before the close of regular trading on the NYSE
(generally 4 p.m., Eastern time), the redemption proceeds will leave Vanguard
by the close of business on the next business day. For requests received by
Vanguard on a business day after the close of regular trading on the NYSE, or
on a nonbusiness day, the redemption proceeds will leave Vanguard by the close
of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an Automatic Withdrawal Plan:
Your trade date generally will be the date you designated for withdrawal of
funds (redemption of shares) from your Vanguard account. Proceeds of redeemed
shares generally will be credited to your designated bank account two business
days after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For redemptions by electronic bank transfer not using an Automatic Withdrawal
Plan: If the redemption request is received by Vanguard on a business day before
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the
trade date generally will be the same day. If the redemption request is received
on a business
48
day after the close of regular trading on the NYSE, or on a nonbusiness day, the
trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Earning Dividends
Shares continue earning dividends through your trade date. There are two
exceptions to this rule: (1) If you redeem shares by writing a check against
your account, the shares will stop earning dividends on the day that your check
posts to your account; and (2) For money market funds only, if you redeem shares
with a same-day wire request before 10:45 a.m., Eastern time (2 p.m., Eastern
time for Vanguard Prime Money Market Fund), the shares will stop earning
dividends that same day.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, or
retirement accounts. Please call us before attempting to redeem from these types
of accounts.
Potentially disruptive redemptions. Vanguard reserves the right to pay all or
part of a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in market-timing
or frequent trading. Under these circumstances, Vanguard also reserves the right
to delay payment of the redemption proceeds for up to seven calendar days. By
calling us before you attempt to redeem a large dollar amount, you may avoid
in-kind or delayed payment of your redemption. Please see Frequent-Trading
Limits for information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may not be made available to you until the fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
Share certificates. If you hold shares in certificates, those shares cannot be
redeemed, exchanged, or converted until you return the certificates (unsigned)
to Vanguard by registered mail. For the correct address, see Contacting
Vanguard.
49
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, we can make your
redemption check payable, or wire your redemption proceeds, to a different
person or send it to a different address. However, this requires the written
consent of all registered account owners and may require a signature guarantee.
You can obtain a signature guarantee from most commercial and savings banks,
credit unions, trust companies, or member firms of a U.S. stock exchange. A
notary public cannot provide a signature guarantee.
No cancellations. Vanguard will not accept your request to cancel any
redemption request once processing has begun. Please be careful when placing a
redemption request.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
Exchanging Shares
An exchange occurs when you use the proceeds from the redemption of shares of
one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund. You can make exchange requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming
Shares.
If the NYSE is open for regular trading (a business day) at the time an exchange
request is received in good order, the trade date will generally be the same
day. See Other Rules You Should Know--Good Order for additional information on
all transaction requests.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
Frequent-Trading Limits
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund
50
account for 60 calendar days after the investor has redeemed or exchanged out of
that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
51
. Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard
will systematically monitor for frequent trading in institutional clients'
accounts. If we detect suspicious trading activity, we will investigate and take
appropriate action, which may include applying to a client's accounts the 60-day
policy previously described, prohibiting a client's purchases of fund shares,
and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
Other Rules You Should Know
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
52
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under
"Account Profile." You can revoke your electronic consent at any time, and we
will begin to send paper copies of these documents within 30 days of receiving
your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
Proof of a caller's authority. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Subject to revision. For any or all shareholders, we reserve the right, at any
time
and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
53
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private, and immediately review any account
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
Unusual Circumstances
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
54
Account Service Fee
For most shareholders, Vanguard deducts a $20 account service fee from all fund
accounts that have a balance below $10,000 for any reason, including market
fluctuation. The account service fee applies to both retirement and
nonretirement fund accounts. The fee will be assessed on fund accounts in all
Vanguard funds, regardless of a fund's minimum investment amount. The account
service fee, which will be collected by redeeming fund shares in the amount of
$20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of
statements, reports, and other materials for all of your fund accounts, the
account service fee for balances below $10,000 will not be charged, so long as
that election remains in effect.
The account service fee also does not apply to the following:
. Money market sweep accounts held through Vanguard Brokerage Services/(R)/.
. Accounts held through intermediaries.
. Accounts held by Voyager, Voyager Select, and Flagship clients. Membership is
based on total household assets held at Vanguard, with a minimum of $100,000 to
qualify for Vanguard Voyager Services/TM/, $500,000 for Vanguard Voyager Select
Services/TM/, and
$1 million for Vanguard Flagship Services/TM/. Vanguard determines membership by
aggregating assets of all eligible accounts held by the investor and immediate
family members who reside at the same address. Aggregate assets include
investments in Vanguard mutual funds, Vanguard ETFs/TM/, annuities through
Vanguard, the Vanguard 529 Plan, certain small-business accounts, and
employer-sponsored retirement plans for which Vanguard provides recordkeeping
services.
. Participant accounts in employer-sponsored defined contribution plans (other
than those served by the Vanguard Small Business Services Department, which are
subject to various fee structures). Please consult your enrollment materials for
the rules that apply to your account.
. Section 529 college savings plans.
Low-Balance Accounts
Each Fund reserves the right, without prior notice, to liquidate any
investment-only retirement-plan fund account or any nonretirement fund account
whose balance falls below the minimum initial investment for any reason,
including market fluctuation. Shares redeemed in accordance with this policy
will be subject to applicable redemption fees.
55
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon initial notification to Vanguard of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
Fund and Account Updates
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividend or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all
56
distributions, purchases, redemptions, exchanges, transfers, and conversions for
the current calendar year. Promptly review each summary that we provide to you
by mail or online. It is important that you contact Vanguard immediately with
any questions you may have about any transaction reflected on the summary, or
Vanguard will consider the transaction properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you in
preparing your income tax returns. These statements, which are generally mailed
in January, will report the previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs and
other retirement plans. These statements can be viewed online.
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard Bond Index Funds twice a year, in February and August. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
57
Contacting Vanguard
Web
----------------------------------------------------------------------------------------
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
----------------------------------------------------------------------------------------
Phone
----------------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R)/ For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
----------------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
----------------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
----------------------------------------------------------------------------------------
Admiral Service Center For Admiral account information
888-237-9949 For most Admiral transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
----------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
----------------------------------------------------------------------------------------
Intermediary Sales For information and services for financial intermediaries
Support including broker-dealers, trust institutions, insurance
800-997-2798 companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to 7 p.m.,
Eastern time
----------------------------------------------------------------------------------------
|
58
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
----------------------------------------------------------------------
Regular Mail (Institutions) The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
|
Fund Numbers
Please use the specific fund number when contacting us:
Investor Shares Admiral Shares
-----------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund 84 584
-----------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund 132 5132
-----------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund 314 5314
-----------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund 522 --
-----------------------------------------------------------------------------
|
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal,
Vanguard Tele-Account, Tele-Account, Vanguard ETF, Vanguard ETFs, Vanguard Small
Business Online, Vanguard Brokerage Services, Vanguard Voyager Services,
Voyager, Vanguard Voyager Select Services, Voyager Select, Vanguard Flagship
Services, Flagship, and the ship logo are trademarks of The Vanguard Group, Inc.
CFA/(R)/ is a trademark owned by CFA Institute. All other marks are the
exclusive property of their respective owners.
59
Glossary of Investment Terms
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
60
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[VANGUARD SHIP LOGO/R/]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond Index Funds, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and
Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Funds are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P084 042008
Vanguard/(R)/ Bond Index Funds
> Prospectus
Investor Shares for Participants
April 25, 2008
[VANGUARD SHIP LOGO/R/
Vanguard Total Bond Market Index Fund
Vanguard Short-Term Bond Index Fund
Vanguard Intermediate-Term Bond Index Fund
Vanguard Long-Term Bond Index Fund
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Contents
------------------------------------------------------------------------------------------
Vanguard Fund Profiles 1 More on the Funds 18
------------------------------------------------------------------------------------------
Total Bond Market Index Fund 1 The Funds and Vanguard 28
------------------------------------------------------------------------------------------
Short-Term Bond Index Fund 5 Investment Advisor 29
------------------------------------------------------------------------------------------
Intermediate-Term Bond Index Fund 9 Dividends, Capital Gains, and Taxes 30
------------------------------------------------------------------------------------------
Long-Term Bond Index Fund 13 Share Price 31
------------------------------------------------------------------------------------------
Investing in Index Funds 17 Financial Highlights 32
------------------------------------------------------------------------------------------
Investing With Vanguard 37
------------------------------------------------------------------------------------------
Accessing Fund Information by Computer 39
------------------------------------------------------------------------------------------
Glossary of Investment Terms 40
------------------------------------------------------------------------------------------
|
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Funds' Investor Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 800-662-7447.
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency.
FUND PROFILE--VANGUARD TOTAL BOND MARKET INDEX FUND
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies, see
More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
. Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 8.58%
1999 -0.76
2000 11.39
2001 8.43
2002 8.26
2003 3.97
2004 4.24
2005 2.40
2006 4.27
2007 6.92
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 4.29% (quarter ended September 30, 2001), and the lowest return for
a quarter was -2.49% (quarter ended June 30, 2004).
2
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
---------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Investor Shares 6.92% 4.35% 5.71%
---------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees or expenses) 6.97% 4.42% 5.97%
---------------------------------------------------------------------------------
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.16%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.03%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.19%
-------------------------------------------------------------------------
1 A portfolio transaction fee of 0.18% may apply to aggregate purchases of more than $500 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
3
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$19 $61 $107 $243
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $55.8 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date December 11, 1986
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation TotBd
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 84
-----------------------------------------------------------------------------------------------
CUSIP Number 921937108
-----------------------------------------------------------------------------------------------
Ticker Symbol VBMFX
-----------------------------------------------------------------------------------------------
|
4
FUND PROFILE--VANGUARD SHORT-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 1-5 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 1 and 5 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally does not exceed 3 years and, as of December 31, 2007, was 2.7 years.
For additional information on the Fund's investment strategies, see More on the
Funds.
Primary Risks
The Fund is designed for investors with a low tolerance for risk, but you could
still lose money by investing in it. The Fund's performance could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be low for the Fund
because it invests mainly in short-term bonds, whose prices are much less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally high for short-term bond
funds, so investors should expect the Fund's monthly income to fluctuate.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
5
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 7.63%
1999 2.08
2000 8.84
2001 8.88
2002 6.10
2003 3.37
2004 1.70
2005 1.31
2006 4.09
2007 7.22
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.89% (quarter ended September 30, 2001), and the lowest return for
a quarter was -1.80% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund Investor Shares 7.22% 3.52% 5.08%
-------------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government/Credit Index
(reflects no deduction for fees or expenses) 7.27 3.60 5.35
-------------------------------------------------------------------------------------
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
6
Shareholder Fees
(Fees paid directly from your investment)
----------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
----------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
----------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
----------------------------------------------------------------------------
Redemption Fee None
----------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
----------------------------------------------------------------------------
Management Expenses 0.15%
----------------------------------------------------------------------------
12b-1 Distribution Fee None
----------------------------------------------------------------------------
Other Expenses 0.03%
----------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.18%
----------------------------------------------------------------------------
1 A portfolio transaction fee of 0.15% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$18 $58 $101 $230
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
7
Additional Information
As of December 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes) $6.5 billion
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,since inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
----------------------------------------------------------------------------------------------
Inception Date March 1, 1994
----------------------------------------------------------------------------------------------
Newspaper Abbreviation STBond
----------------------------------------------------------------------------------------------
Vanguard Fund Number 132
----------------------------------------------------------------------------------------------
CUSIP Number 921937207
----------------------------------------------------------------------------------------------
Ticker Symbol VBISX
----------------------------------------------------------------------------------------------
|
8
FUND PROFILE--VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, see More
on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
9
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 10.09%
1999 -3.00
2000 12.78
2001 9.28
2002 10.85
2003 5.65
2004 5.22
2005 1.75
2006 3.91
2007 7.61
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 6.11% (quarter ended September 30, 1998), and the lowest return for
a quarter was -3.88% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Investor Shares 7.61% 4.81% 6.32%
--------------------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees or expenses) 7.55% 4.87% 6.50%
--------------------------------------------------------------------------------------------
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
10
Shareholder Fees
(Fees paid directly from your investment)
---------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
---------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
---------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
---------------------------------------------------------------------------
Redemption Fee None
---------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
---------------------------------------------------------------------------
Management Expenses 0.15%
---------------------------------------------------------------------------
12b-1 Distribution Fee None
---------------------------------------------------------------------------
Other Expenses 0.03%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.18%
---------------------------------------------------------------------------
1 A portfolio transaction fee of 0.23% may apply to aggregate purchases of more than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$18 $58 $101 $230
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
11
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.2 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date March 1, 1994
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation ITBond
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 314
-----------------------------------------------------------------------------------------------
CUSIP Number 921937306
-----------------------------------------------------------------------------------------------
Ticker Symbol VBIIX
-----------------------------------------------------------------------------------------------
|
12
FUND PROFILE--VANGUARD LONG-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Long Government/
Credit Index. This Index includes all medium and larger issues of U.S.
government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities of greater than 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 15 and 30 years and, as of December 31, 2007, was 20.6
years. For additional information on the Fund's investment strategies, see More
on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be high for the Fund
because it invests mainly in long-term bonds, whose prices are much more
sensitive to interest rate changes than are the prices of short-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally low for long-term bond
funds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
13
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 11.98%
1999 -7.85
2000 16.64
2001 8.17
2002 14.35
2003 5.50
2004 8.40
2005 5.32
2006 2.67
2007 6.59
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 9.44% (quarter ended September 30, 2002), and the lowest return for
a quarter was -5.25% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
----------------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund Investor Shares 6.59% 5.68% 6.97%
----------------------------------------------------------------------------------------
Lehman Brothers U.S. Long Government/Credit Index
(reflects no deduction for fees or expenses) 6.60 5.80 6.95
----------------------------------------------------------------------------------------
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
14
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.15%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.03%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.18%
-------------------------------------------------------------------------
1 A portfolio transaction fee of 0.21% may apply to aggregate purchases of more than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$18 $58 $101 $230
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
15
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $2.8 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date March 1, 1994
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation LTBond
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 522
-----------------------------------------------------------------------------------------------
CUSIP Number 921937405
-----------------------------------------------------------------------------------------------
Ticker Symbol VBLTX
-----------------------------------------------------------------------------------------------
|
16
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." An index is an unmanaged group of securities whose
overall performance is used as a standard to measure the investment performance
of a particular market. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror the performance of the target
index, for better or worse. However, an index fund does not always perform
exactly like its target index. For example, like all mutual funds, index funds
have operating expenses and transaction costs. Market indexes do not, and
therefore will usually have a slight performance advantage over funds that track
them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus dealer markups and other transaction costs--to a minimum.
17
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Each Fund's policy
of investing at least 80% of its assets in bonds that are part of the target
index may be changed only upon 60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
18
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
19
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the dollar-weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, Inc., as of December 31, 2007.
20
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
---------------------------------------------------------------
Short-Term Bond Index Aa1 Aa1
---------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
Long-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Interest Call/ Index
Income Rate Prepayment Credit Sampling
Fund Risk Risk Risk Risk Risk
-------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-------------------------------------------------------------------------------
Short-Term Bond Index High Low Low Low Low
-------------------------------------------------------------------------------
Intermediate-Term Bond Moderate Moderate Low Low Low
Index
-------------------------------------------------------------------------------
Long-Term Bond Index Low High Low Low Low
-------------------------------------------------------------------------------
|
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not
21
hold all issues in their target indexes, some of the issues (and issuers) that
are held will likely be overweighted (or underweighted) compared with the target
indexes. The maximum overweight (or underweight) is constrained at the issuer
level with the goal of producing well-diversified credit exposure in the
portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
-------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
-------------------------------------------------------------------
Short-Term Bond Index 816 1,821
-------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
-------------------------------------------------------------------
Long-Term Bond Index 777 1,083
-------------------------------------------------------------------
|
Types of bonds. The Total Bond Market Index Fund tracks the Lehman Brothers
U.S. Aggregate Bond Index; the Short-, Intermediate-, and Long-Term Bond Funds
track subsets of that Index. Lehman Brothers U.S. Aggregate Bond Index measures
the total universe of taxable investment-grade fixed income securities in the
United States--including government, corporate, and international
dollar-denominated bonds, as well as mortgage-backed and asset-backed
securities--all with maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
---------------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
---------------------------------------------------------------------------------------------------
Short-Term Bond Index 68 27 0 5 0 100
---------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 52 41 0 6 1 100
---------------------------------------------------------------------------------------------------
Long-Term Bond Index 49 46 0 5 0 100
---------------------------------------------------------------------------------------------------
|
22
An explanation of each type of bond follows.
. U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
23
. International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In addition, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of their target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of
24
its target index is terminated, or for any other reason determined in good faith
by the Fund's board of trustees. In any such instance, the substitute index
would measure the same market segment as the current index.
[FLAG]
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Funds
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the Fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
. Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
. Add value when these instruments are attractively priced; or
. Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
Vanguard may invest a small portion of each Fund's assets in shares of bond
exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds
listed in the index or in a subset of the index. Vanguard may purchase ETFs when
doing so will
25
reduce the Fund's transaction costs or add value because the instruments are
favorably priced. Vanguard receives no additional revenue from investing Fund
assets in Vanguard bond ETFs because Fund assets invested in ETF Shares are
excluded when allocating to the Fund its share of the costs of Vanguard
operations.
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
26
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent- trading strategies.
Do not invest with Vanguard if you are a market-timer.
Plain Talk About Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
27
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
Plain Talk About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
28
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately
$1 trillion in assets. Vanguard manages the Funds on an at-cost basis, subject
to the supervision and oversight of the trustees and officers of the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
29
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the Funds
are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); managed the Intermediate-Term Bond Index Fund since its
inception (co-managed since 2008); and managed the Long-Term Bond Index Fund
since 2005 ( co-managed since 2008). Education: B.S., University of Illinois;
M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; has managed the Short-Term Bond Index
Fund since 2005; and has co-managed the Total Bond Market Index and Long-Term
Bond Index Funds since 2008. Education: B.S., The Pennsylvania State University;
M.B.A., The Wharton School of the University of Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has managed
investment portfolios since 2005; and has co-managed the Intermediate-Term Bond
Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh
University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; capital gains distributions generally occur
annually in December. In addition, the Funds may occasionally be required to
make supplemental distributions at some other time during the year.
Your distributions will be reinvested in additional Fund shares and accumulate
on a tax-deferred basis if you are investing through an employer-sponsored
retirement or savings plan. You will not owe taxes on these distributions until
you begin withdrawals from the plan. You should consult your plan administrator,
your plan's Summary Plan Description, or your tax advisor about the tax
consequences of plan withdrawals.
30
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
31
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Investor Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in each table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's Investor Shares as
an example. The Investor Shares began fiscal year 2007 with a net asset value
(price) of $9.99 per share. During the year, each Investor Share earned
$0.501 from investment income (interest) and $0.17 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.501 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $10.16, reflecting earnings of
$0.671 per share and distributions of $0.501 per share. This was an increase
of $0.17 per share (from $9.99 at the beginning of the year to $10.16 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 6.92% for the year.
As of December 31, 2007, the Investor Shares had approximately $29.5 billion
in net assets. For the year, the expense ratio was 0.19% ($1.90 per $1,000 of
net assets), and the net investment income amounted to 5.02% of average net
assets. The Fund sold and replaced securities valued at 54% of its net
assets.
32
Total Bond Market Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.99 $10.06 $10.27 $10.31 $10.38
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .501 .485 .446 .441 .465
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .170 (.070) (.205) (.014) (.060)
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .671 .415 .241 .427 .405
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.501) (.485) (.449) (.446) (.475)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.002) (.021) --
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.501) (.485) (.451) (.467) (.475)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.16 $9.99 $10.06 $10.27 $10.31
==========================================================================================================================
Total Return 6.92% 4.27% 2.40% 4.24% 3.97%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $29,532 $23,769 $21,643 $19,479 $17,032
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.19% 0.20% 0.20% 0.20% 0.22%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.02% 4.88% 4.40% 4.29% 4.46%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 54% 63% 59% 59% 89%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
33
Short-Term Bond Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.89 $9.92 $10.14 $10.28 $10.32
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .456 .426 .350 .303 .329
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .240 (.030) (.220) (.131) .015
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .696 .396 .130 .172 .344
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.456) (.426) (.350) (.303) (.329)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- (.009) (.055)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.456) (.426) (.350) (.312) (.384)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.13 $9.89 $9.92 $10.14 $10.28
==========================================================================================================================
Total Return 7.22% 4.09% 1.31% 1.70% 3.37%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,773 $2,731 $2,951 $3,795 $3,041
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.20%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.58% 4.32% 3.50% 2.97% 3.17%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 79% 106% 106% 92% 111%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
34
Intermediate-Term Bond Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.25 $10.36 $10.68 $10.69 $10.75
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .507 .499 .492 .506 .532
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .250 (.110) (.309) .038 .064
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .757 .389 .183 .544 .596
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.507) (.499) (.492) (.506) (.532)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.011) (.048) (.124)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.507) (.499) (.503) (.554) (.656)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50 $10.25 $10.36 $10.68 $10.69
==========================================================================================================================
Total Return 7.61% 3.91% 1.75% 5.22% 5.65%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $3,020 $2,929 $3,009 $3,501 $2,749
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.20%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.74% 4.91% 4.68% 4.75% 4.91%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 72% 86% 76% 84% 98%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
35
Long-Term Bond Index Fund Investor Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.53 $11.84 $11.82 $11.50 $11.67
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .613 .603 .601 .617 .627
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .120 (.310) .020 .320 .004
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .733 .293 .621 .937 .631
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.613) (.603) (.601) (.617) (.627)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- (.174)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.613) (.603) (.601) (.617) (.801)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.65 $11.53 $11.84 $11.82 $11.50
==========================================================================================================================
Total Return 6.59% 2.67% 5.32% 8.40% 5.50%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,277 $1,898 $1,893 $1,310 $951
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.20%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.34% 5.30% 5.03% 5.34% 5.34%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 62% 55% 52% 62% 76%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
36
INVESTING WITH VANGUARD
One or more of the Funds are an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.
. If you have any questions about a Fund or Vanguard, including those about a
Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV after Vanguard receives the order from your plan
administrator). As long as this request is received before the close of trading
on the New York Stock Exchange (generally 4 p.m., Eastern time), you will
receive that day's NAV. This is known as your trade date.
You begin earning dividends on the next business day after your contribution
trade date. Shares continue earning dividends until the next business day after
your exchange or redemption trade date.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can disrupt the management
37
of the Vanguard funds and increase their transaction costs, Vanguard places
certain limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider
the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
38
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. These postings generally remain
until replaced by new postings as previously described. Please consult the
Fund's Statement of Additional Information or our website for a description of
the policies and procedures that govern disclosure of the Fund's portfolio
holdings.
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark owned by CFA
Institute. All other marks are the exclusive property of their respective
owners.
39
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
40
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
41
[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond Index Funds, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is
available in the Funds' annual and semiannual reports to shareholders. In the
annual report, you will find a
discussion of the market conditions and investment
strategies that significantly affected the Funds'
performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and
Exchange Commission (SEC)
You can review and copy information about the Funds
(including the SAI) at the SEC's Public Reference Room
in Washington, DC. To find out more about this public
service, call the SEC at 202-551-8090. Reports and
other information about the Funds are also available
in the EDGAR database on the SEC's Internet site
at www.sec.gov, or you can receive copies of this
information, for a fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and
Exchange Commission, Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I084 042008
Vanguard/(R)/ Bond Index Funds
> Prospectus
Admiral(TM) Shares for Participants
April 25, 2008
[VANGUARD SHIP LOGO/R/]
Vanguard Total Bond Market Index Fund
Vanguard Short-Term Bond Index Fund
Vanguard Intermediate-Term Bond Index Fund
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
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Vanguard Fund Profiles 1 More on the Funds 14
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Total Bond Market Index Fund 1 The Funds and Vanguard 24
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Short-Term Bond Index Fund 5 Investment Advisor 25
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Intermediate-Term Bond Index Fund 9 Dividends, Capital Gains, and Taxes 26
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Investing in Index Funds 13 Share Price 27
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Financial Highlights 28
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Investing With Vanguard 32
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Accessing Fund Information by Computer 35
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Glossary of Investment Terms 36
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Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Funds' Admiral Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 800-662-7447.
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency.
FUND PROFILE--VANGUARD TOTAL BOND MARKET INDEX FUND
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies, see
More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
. Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 8.32
2003 4.04
2004 4.33
2005 2.49
2006 4.36
2007 7.02
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.87% (quarter ended September 30, 2006), and the lowest return for
a quarter was -2.46% (quarter ended June 30, 2004).
2
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
--------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Admiral Shares 7.02% 4.44% 4.62%
--------------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees or expenses) 6.97% 4.42% 4.90%
--------------------------------------------------------------------------------------------
1 Since-inception returns are from November 12, 2001--the inception date of the
Admiral Shares--through December 31, 2007.
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
--------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------
Redemption Fee None
--------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------
Management Expenses 0.08%
--------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------
Other Expenses 0.02%
--------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
--------------------------------------------------------------------------
1 A portfolio transaction fee of 0.18% may apply to aggregate purchases of more
than $500 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Admiral Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
3
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
as of December 31, 2007
------------------------------------------------------------------------------------------------
Net Assets (all shares classes) $55.8 billion
------------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
------------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
------------------------------------------------------------------------------------------------
Inception Date Investor Shares--December 11, 1986
Admiral Shares--November 12, 2001
------------------------------------------------------------------------------------------------
Newspaper Abbreviation TotBdAdml
------------------------------------------------------------------------------------------------
Vanguard Fund Number 584
------------------------------------------------------------------------------------------------
CUSIP Number 921937603
------------------------------------------------------------------------------------------------
Ticker Symbol VBTLX
------------------------------------------------------------------------------------------------
|
4
FUND PROFILE--VANGUARD SHORT-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 1-5 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 1 and 5 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally does not exceed 3 years and, as of December 31, 2007, was 2.7 years.
For additional information on the Fund's investment strategies, see More on the
Funds.
Primary Risks
The Fund is designed for investors with a low tolerance for risk, but you could
still lose money by investing in it. The Fund's performance could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be low for the Fund
because it invests mainly in short-term bonds, whose prices are much less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally high for short-term bond
funds, so investors should expect the Fund's monthly income to fluctuate.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
5
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 6.15
2003 3.43
2004 1.77
2005 1.38
2006 4.16
2007 7.31
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 2.80% (quarter ended September 30, 2002), and the lowest return for
a quarter was -1.78% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
--------------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund Admiral Shares 7.31% 3.59% 3.74%
--------------------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government/Credit Index
(reflects no deduction for fees or expenses) 7.27% 3.60% 4.07%
--------------------------------------------------------------------------------------------
1 Since-inception returns are from November 12, 2001--the inception date of the
Admiral Shares--through December 31, 2007.
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
6
Shareholder Fees
(Fees paid directly from your investment)
---------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
---------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
---------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
---------------------------------------------------------------------------
Redemption Fee None
---------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
---------------------------------------------------------------------------
Management Expenses 0.07%
---------------------------------------------------------------------------
12b-1 Distribution Fee None
---------------------------------------------------------------------------
Other Expenses 0.03%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
---------------------------------------------------------------------------
1 A portfolio transaction fee of 0.15% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Admiral Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
7
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $6.5 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Admiral Shares--November 12, 2001
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation STBondAdml
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 5132
-----------------------------------------------------------------------------------------------
CUSIP Number 921937702
-----------------------------------------------------------------------------------------------
Ticker Symbol VBIRX
-----------------------------------------------------------------------------------------------
|
8
FUND PROFILE--VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, see More
on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
9
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 10.91
2003 5.70
2004 5.30
2005 1.82
2006 3.98
2007 7.70
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 5.78% (quarter ended September 30, 2002), and the lowest return for
a quarter was -3.86% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
-------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Admiral Shares 7.70% 4.88% 5.26%
-------------------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees or expenses) 7.55% 4.87% 5.54%
-------------------------------------------------------------------------------------------
1 Since-inception returns are from November 12, 2001--the inception date of the
Admiral Shares--through December 31, 2007.
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
10
Shareholder Fees
(Fees paid directly from your investment)
-----------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-----------------------------------------------------------------------
Transaction Fee on Purchases None/1/
-----------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-----------------------------------------------------------------------
Redemption Fee None
-----------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-----------------------------------------------------------------------
Management Expenses 0.07%
-----------------------------------------------------------------------
12b-1 Distribution Fee None
-----------------------------------------------------------------------
Other Expenses 0.03%
-----------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
-----------------------------------------------------------------------
1 A portfolio transaction fee of 0.23% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Admiral Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
11
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.2 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Admiral Shares--November 12, 2001
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation ITBondAdml
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 5314
-----------------------------------------------------------------------------------------------
CUSIP Number 921937801
-----------------------------------------------------------------------------------------------
Ticker Symbol VBILX
-----------------------------------------------------------------------------------------------
|
12
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." An index is an unmanaged group of securities whose
overall performance is used as a standard to measure the investment performance
of a particular market. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror the performance of the target
index, for better or worse. However, an index fund does not always perform
exactly like its target index. For example, like all mutual funds, index funds
have operating expenses and transaction costs. Market indexes do not, and
therefore will usually have a slight performance advantage over funds that track
them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus dealer markups and other transaction costs--to a minimum.
13
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Each Fund's policy
of investing at least 80% of its assets in bonds that are part of the target
index may be changed only upon
60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
14
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
15
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should
be low. The following table shows the dollar-weighted average credit quality of
each Fund's holdings and that of its target index, as rated by Moody's Investors
Service, Inc., as of December 31, 2007.
16
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
--------------------------------------------------------------
Short-Term Bond Index Aa1 Aa1
--------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
--------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Interest Call/ Index
Income Rate Prepayment Credit Sampling
Fund Risk Risk Risk Risk Risk
-------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-------------------------------------------------------------------------------
Short-Term Bond Index High Low Low Low Low
-------------------------------------------------------------------------------
Intermediate-Term Bond Moderate Moderate Low Low Low
Index
-------------------------------------------------------------------------------
|
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not hold
all issues in their target indexes, some of the issues (and issuers) that are
held will likely be overweighted (or underweighted) compared with the target
indexes. The
17
maximum overweight (or underweight) is constrained at the issuer level with the
goal of producing well-diversified credit exposure in the portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
-------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
-------------------------------------------------------------------
Short-Term Bond Index 816 1,821
-------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
-------------------------------------------------------------------
|
Types of bonds. The Total Bond Market Index Fund tracks the Lehman Brothers
U.S. Aggregate Bond Index; the Short- and Intermediate-Term Bond Funds track
subsets of that Index. Lehman Brothers U.S. Aggregate Bond Index measures the
total universe of taxable investment-grade fixed income securities in the United
States--including government, corporate, and international dollar-denominated
bonds, as well as mortgage-backed and asset-backed securities--all with
maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
---------------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
---------------------------------------------------------------------------------------------------
Short-Term Bond Index 68 27 0 5 0 100
---------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 52 41 0 6 1 100
---------------------------------------------------------------------------------------------------
|
An explanation of each type of bond follows.
. U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
18
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
. International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In addition, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
19
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of their target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
LOGO
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
20
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Funds
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the Fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
. Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
. Add value when these instruments are attractively priced; or
. Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
Vanguard may invest a small portion of each Fund's assets in shares of bond
exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds
listed in the index or in a subset of the index. Vanguard may purchase ETFs when
doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in Vanguard bond ETFs because Fund assets invested in ETF
Shares are excluded when allocating to the Fund its share of the costs of
Vanguard operations.
21
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
22
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent- trading strategies.
Do not invest with Vanguard if you are a market-timer.
Plain Talk About Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
23
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
Plain Talk About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
24
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately
$1 trillion in assets. Vanguard manages the Funds on an at-cost basis, subject
to the supervision and oversight of the trustees and officers of the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
25
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the Funds
are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); and managed the Intermediate-Term Bond Index Fund since
its inception (co-managed since 2008). Education: B.S., University of Illinois;
M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; has managed the Short-Term Bond Index
Fund since 2005; and has co-managed the Total Bond Market Index Fund since 2008.
Education: B.S., The Pennsylvania State University; M.B.A., The Wharton School
of the University of Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has managed
investment portfolios since 2005; and has co-managed the Intermediate-Term Bond
Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh
University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; capital gains distributions generally occur
annually in December. In addition, the Funds may occasionally be required to
make supplemental distributions at some other time during the year.
Your distributions will be reinvested in additional Fund shares and accumulate
on a tax-deferred basis if you are investing through an employer-sponsored
retirement or savings plan. You will not owe taxes on these distributions until
you begin withdrawals from the plan. You should consult your plan administrator,
your plan's Summary Plan Description, or your tax advisor about the tax
consequences of plan withdrawals.
26
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
27
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Admiral Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Admiral Share. The total
returns in each table represent the rate that an investor would have earned or
lost each period on an investment in the Admiral Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's Admiral Shares as an
example. The Admiral Shares began fiscal year 2007 with a net asset value
(price) of $9.99 per share. During the year, each Admiral Share earned $0.51
from investment income (interest) and $0.17 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.51 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $10.16, reflecting earnings of
$0.68 per share and distributions of $0.51 per share. This was an increase of
$0.17 per share (from $9.99 at the beginning of the year to $10.16 at the end
of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 7.02% for the year.
As of December 31, 2007, the Admiral Shares had approximately $10.2 billion
in net assets. For the year, the expense ratio was 0.10% ($1.00 per $1,000 of
net assets), and the net investment income amounted to 5.11% of average net
assets. The Fund sold and replaced securities valued at 54% of its net
assets.
28
Total Bond Market Index Fund Admiral Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.99 $10.06 $10.27 $10.31 $10.38
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .510 .494 .455 .450 .472
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .170 (.070) (.205) (.014) (.060)
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .680 .424 .250 .436 .412
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.510) (.494) (.458) (.455) (.482)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.002) (.021) --
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.510) (.494) (.460) (.476) (.482)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.16 $9.99 $10.06 $10.27 $10.31
==========================================================================================================================
Total Return 7.02% 4.36% 2.49% 4.33% 4.04%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $10,232 $7,900 $4,529 $2,502 $2,092
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.10% 0.11% 0.11% 0.11% 0.15%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.11% 4.97% 4.49% 4.38% 4.52%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 54% 63% 59% 59% 89%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
29
Short-Term Bond Index Fund Admiral Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.89 $9.92 $10.14 $10.28 $10.32
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .464 .433 .357 .310 .334
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .240 (.030) (.220) (.131) .015
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .704 .403 .137 .179 .349
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.464) (.433) (.357) (.310) (.334)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- (.009) (.055)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.464) (.433) (.357) (.319) (.389)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.13 $9.89 $9.92 $10.14 $10.28
==========================================================================================================================
Total Return 7.31% 4.16% 1.38% 1.77% 3.43%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,502 $2,528 $2,326 $1,469 $1,177
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.10% 0.11% 0.11% 0.10% 0.15%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.66% 4.39% 3.57% 3.05% 3.21%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 79% 106% 106% 92% 111%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
30
Intermediate-Term Bond Index Fund Admiral Shares
Year Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.25 $10.36 $10.68 $10.69 $10.75
--------------------------------------------------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income .515 .506 .499 .514 .538
--------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .250 (.110) (.309) .038 .064
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .765 .396 .190 .552 .602
--------------------------------------------------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.515) (.506) (.499) (.514) (.538)
--------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.011) (.048) (.124)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.515) (.506) (.510) (.562) (.662)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50 $10.25 $10.36 $10.68 $10.69
==========================================================================================================================
Total Return 7.70% 3.98% 1.82% 5.30% 5.70%
==========================================================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,308 $3,118 $2,949 $1,127 $756
--------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.10% 0.11% 0.11% 0.11% 0.15%
--------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 4.82% 4.98% 4.75% 4.82% 4.96%
--------------------------------------------------------------------------------------------------------------------------
Turnover Rate(1) 72% 86% 76% 84% 98%
==========================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
31
INVESTING WITH VANGUARD
One or more of the Funds are an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.
. If you have any questions about a Fund or Vanguard, including those about a
Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV after Vanguard receives the order from your plan
administrator). As long as this request is received before the close of trading
on the New York Stock Exchange (generally 4 p.m., Eastern time), you will
receive that day's NAV. This is known as your trade date.
You begin earning dividends on the next business day after your contribution
trade date. Shares continue earning dividends until the next business day after
your exchange or redemption trade date.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can disrupt the management
32
of the Vanguard funds and increase their transaction costs, Vanguard places
certain limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider
the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
33
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. These postings generally remain
until replaced by new postings as previously described. Please consult the
Fund's Statement of Additional Information or our website for a description of
the policies and procedures that govern disclosure of the Fund's portfolio
holdings.
34
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Admiral, Vanguard ETF, and the ship
logo are trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark owned by
CFA Institute. All other marks are the exclusive property of their respective
owners.
35
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
36
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
37
[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond Index Funds, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is
available in the Funds' annual and semiannual reports to shareholders. In the
annual report, you will find a
discussion of the market conditions and investment
strategies that significantly affected the Funds'
performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and
Exchange Commission (SEC)
You can review and copy information about the Funds
(including the SAI) at the SEC's Public Reference Room
in Washington, DC. To find out more about this public
service, call the SEC at 202-551-8090. Reports and
other information about the Funds are also available
in the EDGAR database on the SEC's Internet site
at www.sec.gov, or you can receive copies of this
information, for a fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and
Exchange Commission, Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I584 042008
VANGUARD/(R)/ BOND INDEX FUNDS
> PROSPECTUS
INSTITUTIONAL SHARES
April 25, 2008
[VANGUARD SHIP LOGO/R/]
Vanguard Total Bond Market Index Fund
Vanguard Intermediate-Term Bond Index Fund
Vanguard Long-Term Bond Index Fund
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
----------------------------------------------------------------------------------------
Vanguard Fund Profiles 1 Investing With Vanguard 35
----------------------------------------------------------------------------------------
Total Bond Market Index Fund 1 Purchasing Shares 35
----------------------------------------------------------------------------------------
Intermediate-Term Bond Index Fund 6 Converting Shares 38
----------------------------------------------------------------------------------------
Long-Term Bond Index Fund 10 Redeeming Shares 39
----------------------------------------------------------------------------------------
Investing in Index Funds 14 Exchanging Shares 42
----------------------------------------------------------------------------------------
More on the Funds 15 Frequent-Trading Limits 43
----------------------------------------------------------------------------------------
The Funds and Vanguard 25 Other Rules You Should Know 45
----------------------------------------------------------------------------------------
Investment Advisor 25 Fund and Account Updates 48
----------------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes 27 Contacting Vanguard 50
----------------------------------------------------------------------------------------
Share Price 29 Glossary of Investment Terms 52
----------------------------------------------------------------------------------------
Financial Highlights 30
----------------------------------------------------------------------------------------
|
Why Reading This Prospectus is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
This prospectus offers the Funds' Institutional Shares, which are generally for
investors who do not require special employee benefit plan services and who
invest a minimum of $25 million. A separate prospectus offers the Funds'
Investor Shares, which have an investment minimum of $3,000, as well as
Admiral(TM) Shares for the Total Bond Market and Intermediate-Term Bond Index
Funds, which have a minimum of $100,000. In addition, a separate prospectus
offers the Total Bond Market and Intermediate-Term Bond Index Fund's Signal(TM)
Shares, which are generally for institutional clients who invest at least $1
million and meet other eligibility requirements.
The Funds' separate share classes have different expenses; as a result, their
investment performances will differ.
An investment in a fund is not a deposit of a bank and is not insured or
guaranteed by the federal deposit insurance company or any other government
agency.
FUND PROFILE--VANGUARD TOTAL BOND MARKET INDEX FUND
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies,
please see More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
- Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
- Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
- Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
- Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Institutional Shares has varied from one calendar year to another over the
periods shown. The table shows how the average annual total returns compare with
those of the Fund's target index. Keep in mind that the Fund's past performance
(before and after taxes) does not indicate how the Fund will perform in the
future.
Annual Total Returns--Institutional Shares
------------------------------------------------------------
[Bar Chart Range: -20% to 40%]
1998 8.69
1999 -0.66
2000 11.52
2001 8.56
2002 8.39
2003 4.10
2004 4.36
2005 2.53
2006 4.40
2007 7.05
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 4.32% (quarter ended September 30, 2001), and the lowest return for
a quarter was -2.46% (quarter ended June 30, 2004).
2
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Institutional Shares
-----------------------------------------------------------------------------------------------
Return Before Taxes 7.05% 4.48% 5.84%
-----------------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.15 2.75 3.66
-----------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.53 2.80 3.64
-----------------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees, expenses, or taxes) 6.97% 4.42% 5.97%
-----------------------------------------------------------------------------------------------
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
3
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Redemption Fee None/2/
--------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------------
Management Expenses 0.04%
--------------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------------
Other Expenses 0.03%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.07%
--------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.18% may apply to aggregate purchases of more
than $500 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
|
The following example is intended to help you compare the cost of investing in
the Fund's Institutional Shares with the cost of investing in other mutual
funds. It illustrates the hypothetical expenses that you would incur over
various periods if you invest $10,000 in the Fund's shares. This example assumes
that the Shares provide a return of 5% a year and that operating expenses remain
the same. The results apply whether or not you redeem your investment at the end
of the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$7 $23 $40 $90
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
4
Additional Information
As of December 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes) $55.8 billion
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge Pa., since inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
----------------------------------------------------------------------------------------------
Inception Date Investor Shares--December 11, 1986
Institutional Shares--September 18, 1995
----------------------------------------------------------------------------------------------
Minimum Initial Investment $5 million
----------------------------------------------------------------------------------------------
Newspaper Abbreviation TotBdInst
----------------------------------------------------------------------------------------------
Vanguard Fund Number 222
----------------------------------------------------------------------------------------------
CUSIP Number 921937504
----------------------------------------------------------------------------------------------
Ticker Symbol VBTIX
----------------------------------------------------------------------------------------------
|
5
FUND PROFILE--VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, please
see More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
- Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
- Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
- Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
6
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows the performance of the Fund's
Institutional Shares in their first full calendar year. The table shows how the
average annual total returns of the Institutional Shares compare with those of
the the Fund's target index. Keep in mind that the Fund's past performance
(before and after taxes) does not indicate how the Fund will perform in the
future.
Annual Total Returns--Institutional Shares
------------------------------------------------------------
[Bar Chart Range: -20% to 40%]
2007 7.73
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.63% (quarter ended December 31, 2007), and the lowest return for a
quarter was -0.99% (quarter ended June 30, 2007).
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year Inception/1/
-----------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Institutional Shares
-----------------------------------------------------------------------------------
Return Before Taxes 7.73% 6.26%
-----------------------------------------------------------------------------------
Return After Taxes on Distributions 5.85 4.41
-----------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.97 4.24
-----------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 7.55% 6.05%
-----------------------------------------------------------------------------------
1 Since-inception returns are from January 26, 2006.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal
7
income tax bracket at the time of each distribution of income or capital gains
or upon redemption. State and local income taxes are not reflected in the
calculations. Please note that after-tax returns will differ for each share
class in an amount approximately equal to the difference in expense ratios.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Redemption Fee None/2/
--------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------------
Management Expenses 0.05%
--------------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------------
Other Expenses 0.02%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.07%
--------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.23% may apply to aggregate purchases of more
than $100 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
|
8
The following example is intended to help you compare the cost of investing in
the Fund's Institutional Shares with the cost of investing in other mutual
funds. It illustrates the hypothetical expenses that you would incur over
various periods if you invest $10,000 in the Fund's shares. This example assumes
that the Shares provide a return of 5% a year and that operating expenses remain
the same. The results apply whether or not you redeem your investment at the end
of the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$7 $23 $40 $90
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.2 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Institutional Shares--January 26, 2006
-----------------------------------------------------------------------------------------------
Minimum Initial Investment $25 million
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation ITBondInstl
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 0504
-----------------------------------------------------------------------------------------------
CUSIP Number 921937884
-----------------------------------------------------------------------------------------------
Ticker Symbol VBIMX
-----------------------------------------------------------------------------------------------
|
9
FUND PROFILE--VANGUARD LONG-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Long Government/
Credit Index. This Index includes all medium and larger issues of U.S.
government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities of greater than 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 15 and 30 years and, as of December 31, 2007, was 20.6
years. For additional information on the Fund's investment strategies, please
see More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be high for the Fund
because it invests mainly in long-term bonds, whose prices are much more
sensitive to interest rate changes than are the prices of short-term bonds.
- Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally low for long-term bond
funds.
- Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
- Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
10
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows the performance of the Fund's
Institutional Shares in their first full calendar year. The table shows how the
average annual total returns of the Institutional Shares compare with those of
the the Fund's target index. Keep in mind that the Fund's past performance
(before and after taxes) does not indicate how the Fund will perform in the
future.
Annual Total Returns--Institutional Shares
------------------------------------------------------------
[Bar Chart Range: -20% to 40%]
2007 6.71
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 4.05% (quarter ended December 31, 2007), and the lowest return for a
quarter was -1.71% (quarter ended June 30, 2007).
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year Inception/1/
-----------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund Institutional Shares
-----------------------------------------------------------------------------------
Return Before Taxes 6.71% 5.53%
-----------------------------------------------------------------------------------
Return After Taxes on Distributions 4.69 3.55
-----------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.30 3.54
-----------------------------------------------------------------------------------
Lehman Brothers U.S. Long Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 6.60% 5.42%
-----------------------------------------------------------------------------------
1 Since-inception returns are from February 2, 2006.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal
11
income tax bracket at the time of each distribution of income or capital gains
or upon redemption. State and local income taxes are not reflected in the
calculations. Please note that after-tax returns will differ for each share
class in an amount approximately equal to the difference in expense ratios.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Redemption Fee None/2/
--------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------------
Management Expenses 0.04%
--------------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------------
Other Expenses 0.03%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.07%
--------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.21% may apply to aggregate purchases of more
than $100 million by a single investor.
2 A $5 fee applies to wire redemptions under $5,000.
|
12
The following example is intended to help you compare the cost of investing in
the Fund's Institutional Shares with the cost of investing in other mutual
funds. It illustrates the hypothetical expenses that you would incur over
various periods if you invest $10,000 in the Fund's shares. This example assumes
that the Shares provide a return of 5% a year and that operating expenses remain
the same. The results apply whether or not you redeem your investment at the end
of the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$7 $23 $40 $90
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $2.8 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Institutional Shares--February 2, 2006
-----------------------------------------------------------------------------------------------
Minimum Initial Investment $25 million
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation LTBondInstl
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 0545
-----------------------------------------------------------------------------------------------
CUSIP Number 921937876
-----------------------------------------------------------------------------------------------
Ticker Symbol VBLLX
-----------------------------------------------------------------------------------------------
|
13
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." An index is an unmanaged group of securities whose
overall performance is used as a standard to measure the investment performance
of a particular market. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror the performance of the target
index, for better or worse. However, an index fund does not always perform
exactly like its target index. For example, like all mutual funds, index funds
have operating expenses and transaction costs. Market indexes do not, and
therefore will usually have a slight performance advantage over funds that track
them.
Index funds typically have the following characteristics:
- Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
- Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
- Low cost. Index funds are inexpensive to run compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus dealer markups and other transaction costs--to a minimum.
14
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Each Fund's policy
of investing at least 80% of its assets in bonds that are part of the target
index may be changed only upon 60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
15
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
16
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the dollar-weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, Inc., as of December 31, 2007.
17
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
---------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
Long-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Call/ Index
Income Interest Prepayment Credit Sampling
Fund Risk Rate Risk Risk Risk Risk
-----------------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-----------------------------------------------------------------------------------------
Intermediate-Term Bond Index Moderate Moderate Low Low Low
--------------------------------------------------------------------- -------------------
Long-Term Bond Index Low High Low Low Low
-----------------------------------------------------------------------------------------
|
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not hold
all issues in their target indexes, some of the issues (and issuers) that are
held will likely be overweighted (or underweighted) compared with the target
indexes. The
18
maximum overweight (or underweight) is constrained at the issuer level with the
goal of producing well-diversified credit exposure in the portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
------------------------------------------------------------------
Long-Term Bond Index 777 1,083
------------------------------------------------------------------
|
Types of bonds. The Total Bond Market Index Fund tracks the Lehman Brothers
U.S. Aggregate Bond Index; the Intermediate-, and Long-Term Bond Funds track
subsets of that Index. Lehman Brothers U.S. Aggregate Bond Index measures the
total universe of taxable investment-grade fixed income securities in the United
States--including government, corporate, and international dollar-denominated
bonds, as well as mortgage-backed and asset-backed securities--all with
maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
-----------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
-----------------------------------------------------------------------------------------------
Intermediate-Term Bond Index 52 41 0 6 1 100
-----------------------------------------------------------------------------------------------
Long-Term Bond Index 49 46 0 5 0 100
-----------------------------------------------------------------------------------------------
|
An explanation of each type of bond follows.
- U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
19
- Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
- Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
- International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In addition, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
20
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of their target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
[FLAG]
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
21
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Funds
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the Fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
- Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
- Add value when these instruments are attractively priced; or
- Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
Vanguard may invest a small portion of each Fund's assets in shares of bond
exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds
listed in the index or in a subset of the index. Vanguard may purchase ETFs when
doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in Vanguard bond ETFs because Fund assets invested in ETF
Shares are excluded when allocating to the Fund its share of the costs of
Vanguard operations.
22
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
23
- Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
- Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
Do not invest with Vanguard if you are a market-timer.
Plain Talk About Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
24
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
Plain Talk About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately
25
$1 trillion in assets. Vanguard manages the Funds on an at-cost basis, subject
to the supervision and oversight of the trustees and officers of the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
26
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the Funds
are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); managed the Intermediate-Term Bond Index Fund since
its inception (co-managed since 2008); and managed the Long-Term Bond Index
Fund since 2005 (co-managed since 2008). Education: B.S., University of
Illinois; M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; and has co-managed the Total Bond
Market Index and Long-Term Bond Index Funds since 2008. Education: B.S., The
Pennsylvania State University; M.B.A., The Wharton School of the University of
Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has
managed investment portfolios since 2005; and has co-managed the Intermediate-
Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University;
M.B.A., Lehigh University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Fund Distributions
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; capital gains distributions generally occur
annually in December. In addition, the Funds may occasionally be required to
make supplemental distributions at some other time during the year. You can
receive distributions of income or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
27
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
- Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of January--are
taxable for federal income tax purposes as if received in December.
- Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
government may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this exemption.
28
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
- Provide us with your correct taxpayer identification number;
- Certify that the taxpayer identification number is correct; and
- Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
Invalid addresses. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
Tax consequences. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax advisor for detailed information about
a fund's tax consequences for you.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
29
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Institutional Shares' financial performance for the periods shown, and
certain information reflects financial results for a single Institutional Share.
The total returns in each table represent the rate that an investor would have
earned or lost each period on an investment in the Institutional Shares
(assuming reinvestment of all distributions). This information has been derived
from the financial statements audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, whose report--along with each
Fund's financial statements--is included in the Funds' most recent annual report
to shareholders. To receive a free copy of the latest annual or semiannual
report, you may access a report online at www.vanguard.com, or you may contact
Vanguard by telephone or by mail.
30
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's Institutional Shares
as an example. The Institutional Shares began fiscal year 2007 with a net
asset value (price) of $9.99 per share. During the year, each Institutional
Share earned $0.513 from investment income (interest) and $0.17 from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $0.513 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $10.16, reflecting earnings of
$0.683 per share and distributions of $0.513 per share. This was an increase
of $0.17 per share (from $9.99 at the beginning of the year to $10.16 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 7.05% for the year.
As of December 31, 2007, the Institutional Shares had approximately $9.4
billion in net assets. For the year, the expense ratio was 0.07% ($0.70 per
$1,000 of net assets), and the net investment income amounted to 5.14% of
average net assets. The Fund sold and replaced securities valued at 54% of
its net assets.
31
Total Bond Market Index Fund Institutional Shares
Year Ended December 31,
-------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $9.99 $10.06 $10.27 $10.31 $10.38
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .513 .498 .459 .453 .477
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .170 (.070) (.205) (.014) (.060)
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .683 .428 .254 .439 .417
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.513) (.498) (.462) (.458) (.487)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.002) (.021) --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.513) (.498) (.464) (.479) (.487)
----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.16 $9.99 $10.06 $10.27 $10.31
===================================================================================================================================
Total Return 7.05% 4.40% 2.53% 4.36% 4.10%
===================================================================================================================================
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (Millions) $9,492 $8,257 $7,325 $7,444 $6,593
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.07% 0.07% 0.07% 0.08% 0.10%
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.14% 5.01% 4.53% 4.41% 4.60%
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/1/ 54% 63% 59% 59% 89%
===================================================================================================================================
1 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
|
32
Intermediate-Term Bond Index Fund Institutional Shares
Year Jan. 26,
Ended 2006/1/ to
Dec. 31, Dec. 31,
2007 2006
-------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.25 $10.29
-------------------------------------------------------------------------------------------
Investment Operations
-------------------------------------------------------------------------------------------
Net Investment Income .518 .473
-------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .250 (.040)
-------------------------------------------------------------------------------------------
Total from Investment Operations .768 .433
-------------------------------------------------------------------------------------------
Distributions
-------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.518) (.473)
-------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- --
-------------------------------------------------------------------------------------------
Total Distributions (.518) (.473)
-------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50 $10.25
===========================================================================================
Total Return 7.73% 4.36%
===========================================================================================
Ratios/Supplemental Data
-------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $271 $181
-------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.07% 0.08%/2/
-------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.85% 5.01%/2/
-------------------------------------------------------------------------------------------
Turnover Rate/3/ 72% 86%
===========================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind
purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
|
33
Long-Term Bond Index Fund Institutional Shares
Year Feb. 2,
Ended 2006/1/ to
Dec. 31, Dec. 31,
2007 2006
-------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.53 $11.66
-------------------------------------------------------------------------------------------
Investment Operations
-------------------------------------------------------------------------------------------
Net Investment Income .626 .559
-------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .120 (.130)
-------------------------------------------------------------------------------------------
Total from Investment Operations .746 .429
-------------------------------------------------------------------------------------------
Distributions
-------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.626) (.559)
-------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- --
-------------------------------------------------------------------------------------------
Total Distributions (.626) (.559)
-------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.65 $11.53
-------------------------------------------------------------------------------------------
Total Return 6.71% 3.86%
-------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $415 $309
-------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.07% 0.08%/2/
-------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.45% 5.40%/2/
-------------------------------------------------------------------------------------------
Turnover Rate/3/ 62% 55%
-------------------------------------------------------------------------------------------
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind
purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
|
34
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
Each fund you hold in an account is a separate "fund account." For example, if
you hold three funds in a nonretirement account titled in your own name, two
funds in a nonretirement account titled jointly with your spouse, and one fund
in an individual retirement account, you have six fund accounts--and this is
true even if you hold the same fund in multiple accounts.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Institutional Shares
To open and maintain an account. $25 million. Vanguard institutional clients
may meet the minimum investment amount by aggregating up to three separate
accounts within the same Fund. This policy does not apply to clients receiving
special administrative services from Vanguard, nor does this policy apply to
omnibus accounts maintained by financial intermediaries.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
How to Initiate a Purchase Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your purchase request.
Online. You may open certain types of accounts, request an electronic bank
transfer, and make an exchange (using the proceeds from the redemption of shares
from one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund) through our website at www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to begin the account registration process
or request that the account-opening forms be sent to you. You may also request a
purchase of shares by wire, by electronic bank transfer, or by an exchange. See
Contacting Vanguard.
35
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. For a list of Vanguard
addresses, see Contacting Vanguard.
Transaction Fee on Purchases
The Funds reserve the right to charge a transaction fee to investors whose
aggregate share purchases equal or exceed the following amounts:
Total Bond Market Index--$500 million
Intermediate-Term Bond Index Fund--$100 million
Long-Term Bond Index Fund--$100 million
How to Pay For a Purchase
By electronic bank transfer. You may purchase shares of a Vanguard fund through
an electronic transfer of money held in a designated bank account. To establish
the electronic bank transfer option on an account, you must designate a bank
account online, complete a special form, or fill out the appropriate section of
your account registration form. After the option is set up on your account, you
can purchase shares by electronic bank transfer on a regular schedule (Automatic
Investment Plan) or whenever you wish. Your purchase request can be initiated
online, by telephone, or by mail.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. See
Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Initiate a Purchase Request: By mail. Make your
check payable to Vanguard and include the appropriate fund number (e.g.,
Vanguard--xx). For a list of Fund numbers (for Funds in this prospectus), see
Contacting Vanguard.
By exchange. You may purchase shares of a Vanguard fund using the proceeds from
the simultaneous redemption of shares from another Vanguard fund. You may
initiate an exchange online (if you are a registered user of Vanguard.com), by
telephone, or by mail. See Exchanging Shares.
Trade Date
The trade date for any purchase request received in good order will depend on
the day and time Vanguard receives your request, the manner in which you are
paying, and the type of fund you are purchasing. Your purchase will be executed
using the NAV as calculated on the trade date. NAVs are calculated only
on days the New York Stock Exchange (NYSE) is open for trading (a business day).
36
For purchases by check into all funds other than money market funds, and for
purchases by exchange or wire into all funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the purchase request is received on a business day after the close of regular
trading on the NYSE, or on a nonbusiness day, the trade date will be the next
business day.
For purchases by check into money market funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the next
business day. If the purchase request is received on a business day after the
close of regular trading on the NYSE, or on a nonbusiness day, the trade date
will be the second business day following the day Vanguard receives the purchase
request. Because money market instruments must be purchased with federal funds
and it takes a money market mutual fund one business day to convert check
proceeds into federal funds, the trade date will be one business day later than
for other funds.
For purchases by electronic bank transfer using an Automatic Investment Plan:
Your trade date generally will be one business day before the date you
designated for withdrawal from your bank account.
For purchases by electronic bank transfer not using an Automatic Investment
Plan: If the purchase request is received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the next business day. If the
purchase request is received on a business day after 10 p.m., Eastern time, or
on a nonbusiness day, the trade date will be the second business day following
the day Vanguard receives the request.
If your purchase request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Earning Dividends
You begin earning dividends on the business day following your trade date. When
buying money market fund shares through a federal funds wire, however, you can
begin earning dividends immediately by making a purchase request by telephone to
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund).
Other Purchase Rules You Should Know
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money
37
orders. In addition, Vanguard may refuse "starter checks" and checks that are
not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Vanguard will not accept your request to cancel any purchase
request once processing has begun. Please be careful when placing a purchase
request.
CONVERTING SHARES
When a conversion occurs, you receive shares of one class in place of shares of
another class of the same fund. At the time of conversion, the dollar value of
the "new" shares you receive equals the dollar value of the "old" shares that
were converted. In other words, the conversion has no effect on the value of
your investment in the fund. However, the number of shares you own after the
conversion may be greater than or less than the number of shares you owned
before the conversion, depending on the net asset values of the two share
classes.
A conversion between share classes of the same fund is a nontaxable event.
Trade Date
The trade date for any conversion request received in good order will depend on
the day and time Vanguard receives your request. Your conversion will be
executed using the NAV of the different share classes on the trade date. NAVs
are calculated only on days the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close
of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day. For a conversion request received on a business day after
the close of
38
regular trading on the NYSE, or on a nonbusiness day, the trade date will be the
next business day. See Other Rules You Should Know.
Conversions to Institutional Shares
You are eligible for a self-directed conversion from another share class to
Institutional Shares of the same Fund, provided that your account meets all
Institutional Shares' eligibility requirements. Registered users of our website,
www.vanguard.com, may request a conversion online, or you may contact Vanguard
by telephone or by mail to request this transaction. Accounts that qualify for
Institutional Shares will not be automatically converted.
Mandatory Conversions to Another Share Class
If an account no longer meets the balance requirements for Institutional Shares,
Vanguard may automatically convert the shares in the account to another share
class, as appropriate. A decline in the account balance because of market
movement may result in such a conversion. Vanguard will notify the investor in
writing before any mandatory conversion occurs.
REDEEMING SHARES
How to Initiate a Redemption Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your redemption request.
Online. You may redeem shares, request an electronic bank transfer, and make an
exchange (the purchase of shares of one Vanguard fund using the proceeds of a
simultaneous redemption from another Vanguard fund) through our website at
www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. See Contacting Vanguard.
By writing a check. If you've established the checkwriting service on your
account, you can redeem shares by writing a check for $250 or more.
How to Receive Redemption Proceeds
By electronic bank transfer. You may have the proceeds of a fund redemption
sent directly to a designated bank account. To establish the electronic bank
transfer option, you must designate a bank account online, complete a special
form, or fill out the
39
appropriate section of your account registration form. After the option is set
up on your account, you can redeem shares by electronic bank transfer on a
regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish
($100 minimum). Your transaction can be initiated online, by telephone, or by
mail.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
By exchange. You may have the proceeds of a Vanguard fund redemption invested
directly in shares of another Vanguard fund. You may initiate an exchange online
(if you are a registered user of Vanguard.com), by telephone, or by mail.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
The trade date for any redemption request received in good order will depend on
the day and time Vanguard receives your request and the manner in which you are
redeeming. Your redemption will be executed using the NAV as calculated
on the trade date. NAVs are calculated only on days that the NYSE is open for
trading (a business day).
For redemptions by check, exchange, or wire: If the redemption request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the redemption request is received on a business day after the close of
regular trading on the NYSE, or on a nonbusiness day, the trade date will be the
next business day.
- Note on timing of wire redemptions from money market funds: For telephone
requests received by Vanguard on a business day before 10:45 a.m., Eastern
time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the
redemption proceeds will leave Vanguard by the close of business the same day.
For telephone requests received by Vanguard on a business day after those
cut-off times, or on a nonbusiness day, and for all requests other than by
telephone, the redemption proceeds will leave Vanguard by the close of
business on the next business day.
40
- Note on timing of wire redemptions from bond funds: For requests received by
Vanguard on a business day before the close of regular trading on the NYSE
(generally 4 p.m., Eastern time), the redemption proceeds will leave Vanguard
by the close of business on the next business day. For requests received by
Vanguard on a business day after the close of regular trading on the NYSE, or
on a nonbusiness day, the redemption proceeds will leave Vanguard by the close
of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an Automatic Withdrawal Plan:
Your trade date generally will be the date you designated for withdrawal of
funds (redemption of shares) from your Vanguard account. Proceeds of redeemed
shares generally will be credited to your designated bank account two business
days after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For redemptions by electronic bank transfer not using an Automatic Withdrawal
Plan: If the redemption request is received by Vanguard on a business day before
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the
trade date generally will be the same day. If the redemption request is received
on a business day after the close of regular trading on the NYSE, or on a
nonbusiness day, the trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Earning Dividends
Shares continue earning dividends through your trade date.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, or
retirement accounts. Please call us before attempting to redeem from these types
of accounts.
Potentially disruptive redemptions. Vanguard reserves the right to pay all or
part of a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in market-timing
or frequent trading. Under these circumstances, Vanguard also reserves the right
to delay payment of the redemption proceeds for up to seven calendar days. By
calling us before you attempt to redeem a large dollar amount, you may avoid
in-kind or delayed payment of your redemption.
41
Please see Frequent-Trading Limits for information about Vanguard's policies to
limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may not be made available to you until the fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
Share certificates. If you hold shares in certificates, those shares cannot be
redeemed, exchanged, or converted until you return the certificates (unsigned)
to Vanguard by registered mail. For the correct address, see Contacting
Vanguard.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, we can make your
redemption check payable, or wire your redemption proceeds, to a different
person or send it to a different address. However, this requires the written
consent of all registered account owners and may require a signature guarantee.
You can obtain a signature guarantee from most commercial and savings banks,
credit unions, trust companies, or member firms of a U.S. stock exchange. A
notary public cannot provide a signature guarantee.
No cancellations. Vanguard will not accept your request to cancel any
redemption request once processing has begun. Please be careful when placing a
redemption request.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
An exchange occurs when you use the proceeds from the redemption of shares of
one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund. You can make exchange requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming
Shares.
If the NYSE is open for regular trading (a business day) at the time an exchange
request is received in good order, the trade date will generally be the same
day.
42
See Other Rules You Should Know--Good Order for additional information on all
transaction requests.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
- Purchases of shares with reinvested dividend or capital gains distributions.
- Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
- Redemptions of shares to pay fund or account fees.
- Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
- Transfers and re-registrations of shares within the same fund.
- Purchases of shares by asset transfer or direct rollover.
- Conversions of shares from one share class to another in the same fund.
- Checkwriting redemptions.
- Section 529 college savings plans.
- Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
- Purchases of shares with participant payroll or employer contributions or
loan repayments.
43
- Purchases of shares with reinvested dividend or capital gains distributions.
- Distributions, loans, and in-service withdrawals from a plan.
- Redemptions of shares as part of a plan termination or at the direction of the
plan.
- Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
- Redemptions of shares to pay fund or account fees.
- Share or asset transfers or rollovers.
- Re-registrations of shares.
- Conversions of shares from one share class to another in the same fund.
- Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
Accounts Held by Institutions (Other Than Defined Contribution Plans)
Vanguard will systematically monitor for frequent trading in institutional
clients' accounts. If we detect suspicious trading activity, we will investigate
and take appropriate action, which may include applying to a client's accounts
the 60-day policy previously described, prohibiting a client's purchases of fund
shares, and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
44
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under
"Account Profile." You can revoke your electronic consent at any time, and we
will begin to send paper copies of these documents within 30 days of receiving
your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
Proof of a caller's authority. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
- Authorization to act on the account (as the account owner or by legal
documentation or other means).
- Account registration and address.
- Fund name and account number, if applicable.
- Other information relating to the caller, the account holder, or the account.
45
Subject to revision. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
- The fund name and account number.
- The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
- Signatures of all registered owners.
- Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
- Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private, and immediately review any account
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
46
Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
Unusual Circumstances
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Low-Balance Accounts
Each Fund reserves the right to convert an investor's Institutional Shares to
another share class, as appropriate, if the fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. Any
such conversion will be preceded by written notice to the investor.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon initial notification to Vanguard of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at
47
the sole discretion of Vanguard management, we reasonably believe they are
deemed to be in the best interest of a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
FUND AND ACCOUNT UPDATES
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you in
preparing your income tax returns. These statements, which are generally mailed
in January, will report the previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs and
other retirement plans. These statements can be viewed online.
48
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard Bond Index Funds twice a year, in February and August. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
- Performance assessments and comparisons with industry benchmarks.
- Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
49
CONTACTING VANGUARD
WEB
------------------------------------------------------------------------------------------------------------
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days a week For fund, account, and service information
For most account transactions
For literature requests
------------------------------------------------------------------------------------------------------------
PHONE
------------------------------------------------------------------------------------------------------------
Vanguard Tele-Account/(R)/ 800-662-6273 For automated fund and account information
(ON-BOARD) For exchange transactions (subject to limitations)
Toll-free, 24 hours a day, 7 days a week
------------------------------------------------------------------------------------------------------------
Investor Information 800-662-7447 (SHIP) For fund and service information
(Text telephone for people with hearing For literature requests
impairment at 800-952-3335) Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Client Services 800-662-2739 (CREW) For account information
(Text telephone for people with hearing For most account transactions
impairment at 800-749-7273) Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
------------------------------------------------------------------------------------------------------------
Intermediary Sales Support For information and services for financial intermediaries
800-997-2798 including broker-dealers, trust institutions, insurance
companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to 7 p.m.,
Eastern time
------------------------------------------------------------------------------------------------------------
|
50
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
----------------------------------------------------------------------
Regular Mail (Institutions) The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
|
Fund Numbers
Please use the specific fund number when contacting us:
Institutional Shares
------------------------------------------------------------------
Vanguard Total Bond Market Index Fund 222
------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund 504
------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund 545
------------------------------------------------------------------
|
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal,
Vanguard Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business
Online, and the ship logo are trademarks of The Vanguard Group, Inc. CFA/(R)/ is
a trademark owned by CFA Institute. All other marks are the exclusive property
of their respective owners.
51
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
52
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond Index Funds, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
If you are an individual investor:
The Vanguard Group
Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-662-7447 (SHIP); Text telephone for people with hearing
impairment: 800-952-3335
If you are a client of Vanguard's Institutional Division:
The Vanguard Group
Institutional Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 888-809-8102; Text telephone for people with hearing impairment:
800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW); Text telephone for people with hearing
impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Funds are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I0504 042008
Vanguard/(R)/ Bond ETFs
> Prospectus
Exchange-traded fund shares that are not individually redeemable
April 25, 2008
[VANGUARD SHIP LOGO/R/]
Vanguard Total Bond Market ETF
Vanguard Short-Term Bond ETF
Vanguard Intermediate-Term Bond ETF
Vanguard Long-Term Bond ETF
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
-----------------------------------------------------------------------------------------
Vanguard ETF Profiles 1 More on the Funds and ETF Shares 23
-----------------------------------------------------------------------------------------
Total Bond Market ETF 1 The Funds and Vanguard 40
-----------------------------------------------------------------------------------------
Short-Term Bond ETF 6 Investment Advisor 41
-----------------------------------------------------------------------------------------
Intermediate-Term Bond ETF 11 Dividends, Capital Gains, and Taxes 42
-----------------------------------------------------------------------------------------
Long-Term Bond ETF 16 Daily Pricing 44
-----------------------------------------------------------------------------------------
Investing in Vanguard ETF Shares 21 Financial Highlights 45
-----------------------------------------------------------------------------------------
Glossary of Investment Terms 51
-----------------------------------------------------------------------------------------
|
A Note to Retail Investors
Vanguard ETF Shares can be purchased directly from the issuing Fund only in
exchange for a basket of securities that is expected to be worth several million
dollars. Most individual investors, therefore, will not be able to purchase ETF
Shares directly from the Fund. Instead, these investors will purchase ETF Shares
on the secondary market with the assistance of a broker. Thus, some of the
information contained in this prospectus--such as information about purchasing
and redeeming ETF Shares from a Fund and references to transaction fees imposed
on purchases and redemptions--is not relevant to most individual investors.
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency.
ETF PROFILE--VANGUARD TOTAL BOND MARKET ETF
The following profile summarizes key features of Vanguard Total Bond Market ETF,
an exchange-traded class of shares issued by Vanguard Total Bond Market Index
Fund.
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies, see
More on the Funds and ETF Shares.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
. Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Because ETF Shares are traded on an exchange, they are subject to additional
risks:
. Total Bond Market ETF Shares are listed for trading on the American Stock
Exchange (AMEX) and can be bought and sold on the secondary market at market
prices. Although it is expected that the market price of a Total Bond Market ETF
Share typically will approximate its net asset value, there may be times when
the market price and the NAV vary significantly. Thus, you may pay more than NAV
when you buy Total Bond Market ETF Shares on the secondary market, and you may
receive less than NAV when you sell those shares.
. Although Total Bond Market ETF Shares are listed for trading on the AMEX, it
is possible that an active trading market may not develop or be maintained.
. Trading of Total Bond Market ETF Shares on the AMEX may be halted if AMEX
officials deem such action appropriate, if Total Bond Market ETF Shares are
delisted from the AMEX, or if the activation of marketwide "circuit breakers"
halts trading generally.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's ETF Shares, the information presented in the bar
chart and table reflects the performance of the Investor Shares of Vanguard
Total Bond Market Index Fund. (Investor Shares are offered through a separate
prospectus.) Performance based on net asset value for the ETF Shares Shares
would be substantially similar, because both share classes constitute an
investment in the same portfolio of securities; their returns generally should
differ only to the extent that the expenses of the two classes differ. The bar
chart shows how the performance of the Fund's Investor Shares has varied from
one calendar year to another over the periods shown. The table shows how the
average annual total returns of the Fund's Investor Shares compare with those of
the Fund's target index. Keep in mind that the Fund's past performance (before
and after taxes) does not indicate how the Fund will perform in the future.
2
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 8.58%
1999 -0.76
2000 11.39
2001 8.43
2002 8.26
2003 3.97
2004 4.24
2005 2.40
2006 4.27
2007 6.92
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 4.29% (quarter ended September 30, 2001), and the lowest return for
a quarter was -2.49% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Investor Shares
-----------------------------------------------------------------------------------------
Return Before Taxes 6.92% 4.35% 5.71%
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.07 2.66 3.58
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.45 2.72 3.57
-----------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees, expenses, or taxes) 6.97% 4.42% 5.97%
-----------------------------------------------------------------------------------------
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
3
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold ETF Shares of Vanguard Total Bond Market Index Fund. As is the case with
all mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in the prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Transaction Fee on Purchases and Redemptions Varies/1/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.09%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.02%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.11%
-------------------------------------------------------------------------------
1 The transaction fee for purchasing one or more Creation Units of Total Bond
Market ETF with the prescribed basket is $500 plus a variable charge, which
will be disclosed to investors before they place an order, in an amount
approximately equal to the transaction costs the Fund expects to incur buying
the mortgage TBA securities that are part of the basket. The variable charge
is expected to be the sum of the bid price market values of the TBAs
multiplied by 0.05% (or 5 basis points), but could be higher or lower,
depending on market conditions. The transaction fee for redeeming one or more
Creation Units is $500. Investors purchasing or redeeming units with a
nonconforming basket may be subject to an additional charge. An investor
buying or selling Total Bond Market ETF Shares on the secondary market will
pay a commission to his or her broker in an amount established by the broker.
|
4
The following example is intended to help retail investors compare the cost of
investing in Vanguard Total Bond Market ETF with the cost of investing in other
funds. It illustrates the hypothetical expenses that such investors would incur
over various periods if they invest $10,000 in Total Bond Market ETF. This
example assumes that Total Bond Market ETF Shares provide a return of 5% a year
and that operating expenses remain the same. This example does not include the
brokerage commissions that retail investors will pay to buy and sell Total Bond
Market ETF Shares. It also does not include the transaction fees on purchases
and redemptions of Creation Units, because these fees will not be imposed on
retail investors.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$11 $35 $62 $141
--------------------------------------------------------
|
The value of a Total Bond Market ETF Creation Unit as of December 31, 2007, was
approximately $7.6 million. Assuming an investment of $7.6 million, payment of
the standard $500 transaction fee applicable to both the purchase and redemption
of the Creation Unit, the 0.05% variable transaction fee on the mortgage TBA
portion of a purchase, a 5% return each year, and no change in operating
expenses, the total costs of holding a Total Bond Market ETF Creation Unit would
be $10,892 if the Creation Unit were redeemed after one year and $29,294 if
redeemed after three years.
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes of $55.8 billion
Vanguard Total Bond Market Index Fund)
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since
inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared and distributed monthly; capital
gains, if any, are distributed annually in December.
----------------------------------------------------------------------------------------------
Inception Date Investor Shares-December 11, 1986
ETF Shares-April 3, 2007
----------------------------------------------------------------------------------------------
Number of Vanguard Total Bond 100,000
Market ETF Shares in a Creation Unit
----------------------------------------------------------------------------------------------
Vanguard Fund Number 928
----------------------------------------------------------------------------------------------
CUSIP Number 921937835
----------------------------------------------------------------------------------------------
AMEX Ticker Symbol BND
----------------------------------------------------------------------------------------------
|
5
ETF PROFILE--VANGUARD SHORT-TERM BOND ETF
The following profile summarizes key features of Vanguard Short-Term Bond ETF,
an exchange-traded class of shares issued by Vanguard Short-Term Bond Index
Fund.
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 1-5 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 1 and 5 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally does not exceed 3 years and, as of December 31, 2007, was 2.7 years.
For additional information on the Fund's investment strategies, see More on the
Funds and ETF Shares.
Primary Risks
The Fund is designed for investors with a low tolerance for risk, but you could
still lose money by investing in it. The Fund's performance could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be low for the Fund
because it invests mainly in short-term bonds, whose prices are much less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally high for short-term bond
funds, so investors should expect the Fund's monthly income to fluctuate.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
6
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Because ETF Shares are traded on an exchange, they are subject to additional
risks:
. Short-Term Bond ETF Shares are listed for trading on the American Stock
Exchange (AMEX) and can be bought and sold on the secondary market at market
prices. Although it is expected that the market price of a Short-Term Bond ETF
Share typically will approximate its net asset value, there may be times when
the market price and the NAV vary significantly. Thus, you may pay more than NAV
when you buy Short-Term Bond ETF Shares on the secondary market, and you may
receive less than NAV when you sell those shares.
. Although Short-Term Bond ETF Shares are listed for trading on the AMEX, it is
possible that an active trading market may not develop or be maintained.
. Trading of Short-Term Bond ETF Shares on the AMEX may be halted if AMEX
officials deem such action appropriate, if Short-Term Bond ETF Shares are
delisted from the AMEX, or if the activation of marketwide "circuit breakers"
halts trading generally.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's ETF Shares, the information presented in the bar
chart and table reflects the performance of the Investor Shares of Vanguard
Short-Term Bond Index Fund. (Investor Shares are offered through a separate
prospectus.) Performance based on net asset value for the ETF Shares Shares
would be substantially similar, because both share classes constitute an
investment in the same portfolio of securities; their returns generally should
differ only to the extent that the expenses of the two classes differ. The bar
chart shows how the performance of the Fund's Investor Shares has varied from
one calendar year to another over the periods shown. The table shows how the
average annual total returns of the Fund's Investor Shares compare with those of
the Fund's target index. Keep in mind that the Fund's past performance (before
and after taxes) does not indicate how the Fund will perform in the future.
7
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 7.63%
1999 2.08
2000 8.84
2001 8.88
2002 6.10
2003 3.37
2004 1.70
2005 1.31
2006 4.09
2007 7.22
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.89% (quarter ended September 30, 2001), and the lowest return for
a quarter was -1.80% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund Investor Shares
-----------------------------------------------------------------------------------------
Return Before Taxes 7.22% 3.52% 5.08%
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.52 2.16 3.21
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.65 2.21 3.19
-----------------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 7.27% 3.60% 5.35%
-----------------------------------------------------------------------------------------
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
8
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold ETF Shares of Vanguard Short-Term Bond Index Fund. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in the prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
------------------------------------------------------------------------
Transaction Fee on Purchases and Redemptions $500/1/
------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
------------------------------------------------------------------------
Management Expenses 0.09%
------------------------------------------------------------------------
12b-1 Distribution Fee None
------------------------------------------------------------------------
Other Expenses 0.02%
------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.11%
------------------------------------------------------------------------
1 If a Creation Unit is purchased or redeemed with a nonconforming basket, an
additional fee may apply. An investor buying or selling Short-Term Bond ETF
Shares on the secondary market will pay a commission to his or her broker in
an amount established by the broker.
|
The following example is intended to help retail investors compare the cost of
investing in Vanguard Short-Term Bond ETF with the cost of investing in other
funds. It illustrates the hypothetical expenses that such investors would incur
over various periods if they invest $10,000 in Short-Term Bond ETF. This example
assumes that Short-Term Bond ETF Shares provide a return of 5% a year and that
operating expenses remain the same. This example does not include the brokerage
commissions that retail investors will pay to buy and sell Short-Term Bond ETF
Shares. It also does not include the transaction fees on purchases and
redemptions of Creation Units, because these fees will not be imposed on retail
investors.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$11 $35 $62 $141
--------------------------------------------------------
|
9
The value of a Short-Term Bond ETF Creation Unit as of December 31, 2007, was
approximately $7.5 million. Assuming an investment of $7.5 million, payment of
the standard $500 transaction fee applicable to both the purchase and redemption
of the Creation Unit, a 5% return each year, and no change in operating
expenses, the total costs of holding a Short-Term Bond ETF Creation Unit would
be $9,451 if the Creation Unit were redeemed after one year and $27,613 if
redeemed after three years.
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31,
2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes of $6.5 billion
Vanguard Short-Term Bond Index Fund)
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since
inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared and distributed monthly; capital
gains, if any, are distributed annually in December.
----------------------------------------------------------------------------------------------
Inception Date Investor Shares-March 1, 1994
ETF Shares-April 3, 2007
----------------------------------------------------------------------------------------------
Number of Short-Term Bond ETF 100,000
Shares in a Creation Unit
----------------------------------------------------------------------------------------------
Vanguard Fund Number 924
----------------------------------------------------------------------------------------------
CUSIP Number 921937827
----------------------------------------------------------------------------------------------
AMEX Ticker Symbol BSV
----------------------------------------------------------------------------------------------
|
10
ETF PROFILE--VANGUARD INTERMEDIATE-TERM BOND ETF
The following profile summarizes key features of Vanguard Intermediate-Term Bond
ETF, an exchange-traded class of shares issued by Vanguard Intermediate-Term
Bond Index Fund.
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, see More
on the Funds and ETF Shares.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
11
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Because ETF Shares are traded on an exchange, they are subject to additional
risks:
. Intermediate-Term Bond ETF Shares are listed for trading on the American Stock
Exchange (AMEX) and can be bought and sold on the secondary market at market
prices. Although it is expected that the market price of an Intermediate-Term
Bond ETF Share typically will approximate its net asset value, there may be
times when the market price and the NAV vary significantly. Thus, you may pay
more than NAV when you buy Intermediate-Term Bond ETF Shares on the secondary
market, and you may receive less than NAV when you sell those shares.
. Although Intermediate-Term Bond ETF Shares are listed for trading on the AMEX,
it is possible that an active trading market may not develop or be maintained.
. Trading of Intermediate-Term Bond ETF Shares on the AMEX may be halted if AMEX
officials deem such action appropriate, if Intermediate-Term Bond ETF Shares are
delisted from the AMEX, or if the activation of marketwide "circuit breakers"
halts trading generally.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's ETF Shares, the information presented in the bar
chart and table reflects the performance of the Investor Shares of Vanguard
Intermediate-Term Bond Index Fund. (Investor Shares are offered through a
separate prospectus.) Performance based on net asset value for the ETF Shares
Shares would be substantially similar, because both share classes constitute an
investment in the same portfolio of securities; their returns generally should
differ only to the extent that the expenses of the two classes differ. The bar
chart shows how the performance of the Fund's Investor Shares has varied from
one calendar year to another over the periods shown. The table shows how the
average annual total returns of the Fund's Investor Shares compare with those of
the Fund's target index. Keep in mind that the Fund's past performance (before
and after taxes) does not indicate how the Fund will perform in the future.
12
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 10.09
1999 -3.00
2000 12.78
2001 9.28
2002 10.85
2003 5.65
2004 5.22
2005 1.75
2006 3.91
2007 7.61
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 6.11% (quarter ended September 30, 1998), and the lowest return for
a quarter was -3.88% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Investor Shares
------------------------------------------------------------------------------------------
Return Before Taxes 7.61% 4.81% 6.32%
------------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.78 3.00 4.08
------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.90 3.06 4.04
------------------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 7.55% 4.87% 6.50%
------------------------------------------------------------------------------------------
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
13
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold ETF Shares of Vanguard Intermediate-Term Bond Index Fund. As is the case
with all mutual funds, transaction costs incurred by the Fund for buying and
selling securities are not reflected in the table. However, these costs are
reflected in the investment performance figures included in the prospectus. The
expenses shown under Annual Fund Operating Expenses are based on those incurred
in the fiscal year ended December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Transaction Fee on Purchases and Redemptions $500/1/
--------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------------
Management Expenses 0.10%
--------------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------------
Other Expenses 0.01%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.11%
--------------------------------------------------------------------------------
1 If a Creation Unit is purchased or redeemed with a nonconforming basket, an
additional fee may apply. An investor buying or selling Intermediate-Term
Bond ETF Shares on the secondary market will pay a commission to his or her
broker in an amount established by the broker.
|
The following example is intended to help retail investors compare the cost of
investing in Vanguard Intermediate-Term Bond ETF with the cost of investing in
other funds. It illustrates the hypothetical expenses that such investors would
incur over various periods if they invest $10,000 in Intermediate-Term Bond ETF.
This example assumes that Intermediate-Term Bond ETF Shares provide a return of
5% a year and that operating expenses remain the same. This example does not
include the brokerage commissions that retail investors will pay to buy and sell
Intermediate-Term Bond ETF Shares. It also does not include the transaction fees
on purchases and redemptions of Creation Units, because these fees will not be
imposed on retail investors.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$11 $35 $62 $141
--------------------------------------------------------
|
14
The value of a Intermediate-Term Bond ETF Creation Unit as of December 31, 2007,
was approximately $7.7 million. Assuming an investment of $7.7 million, payment
of the standard $500 transaction fee applicable to both the purchase and
redemption of the Creation Unit, a 5% return each year, and no change in
operating expenses, the total costs of holding a Intermediate-Term Bond ETF
Creation Unit would be $9,677 if the Creation Unit were redeemed after one year
and $28,323 if redeemed after three years.
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
-------------------------------------------------------------------------------------------------
Net Assets (all share classes of $7.2 billion
Vanguard Intermediate-Term Bond
Index Fund)
-------------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-------------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared and distributed monthly; capital
gains, if any are distributed annually in December.
-------------------------------------------------------------------------------------------------
Inception Date Investor Shares-March 1, 1994
ETF Shares-April 3, 2007
-------------------------------------------------------------------------------------------------
Number of Intermediate-Term Bond 100,000
Index ETF Shares in a Creation Unit
-------------------------------------------------------------------------------------------------
Vanguard Fund Number 925
-------------------------------------------------------------------------------------------------
CUSIP Number 921937819
-------------------------------------------------------------------------------------------------
AMEX Ticker Symbol BIV
-------------------------------------------------------------------------------------------------
|
15
ETF PROFILE--VANGUARD LONG-TERM BOND ETF
The following profile summarizes key features of Vanguard Long-Term Bond ETF, an
exchange-traded class of shares issued by Vanguard Long-Term Bond Index Fund.
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Long Government/
Credit Index. This Index includes all medium and larger issues of U.S.
government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities of greater than 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 15 and 30 years and, as of December 31, 2007, was 20.6
years. For additional information on the Fund's investment strategies, see More
on the Funds and ETF Shares.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be high for the Fund
because it invests mainly in long-term bonds, whose prices are much more
sensitive to interest rate changes than are the prices of short-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally low for long-term bond
funds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
16
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Because ETF Shares are traded on an exchange, they are subject to additional
risks:
. Long-Term Bond ETF Shares are listed for trading on the American Stock
Exchange (AMEX) and can be bought and sold on the secondary market at market
prices. Although it is expected that the market price of a Long-Term Bond ETF
Share typically will approximate its net asset value, there may be times when
the market price and the NAV vary significantly. Thus, you may pay more than NAV
when you buy Long-Term Bond ETF Shares on the secondary market, and you may
receive less than NAV when you sell those shares.
. Although Long-Term Bond ETF Shares are listed for trading on the AMEX, it is
possible that an active trading market may not develop or be maintained.
. Trading of Long-Term Bond ETF Shares on the AMEX may be halted if AMEX
officials deem such action appropriate, if Long-Term Bond ETF Shares are
delisted from the AMEX, or if the activation of marketwide "circuit breakers"
halts trading generally.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's ETF Shares, the information presented in the bar
chart and table reflects the performance of the Investor Shares of Vanguard
Long-Term Bond Index Fund. (Investor Shares are offered through a separate
prospectus.) Performance based on net asset value for the ETF Shares Shares
would be substantially similar, because both share classes constitute an
investment in the same portfolio of securities; their returns generally should
differ only to the extent that the expenses of the two classes differ. The bar
chart shows how the performance of the Fund's Investor Shares has varied from
one calendar year to another over the periods shown. The table shows how the
average annual total returns of the Fund's Investor Shares compare with those of
the Fund's target index. Keep in mind that the Fund's past performance (before
and after taxes) does not indicate how the Fund will perform in the future.
17
Annual Total Returns--Investor Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
1998 11.98%
1999 -7.85
2000 16.64
2001 8.17
2002 14.35
2003 5.50
2004 8.40
2005 5.32
2006 2.67
2007 6.59
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 9.44% (quarter ended September 30, 2002), and the lowest return for
a quarter was -5.25% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund Investor Shares
-----------------------------------------------------------------------------------------
Return Before Taxes 6.59% 5.68% 6.97%
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions 4.62 3.68 4.65
-----------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.23 3.68 4.54
-----------------------------------------------------------------------------------------
Lehman Brothers U.S. Long Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 6.60% 5.80% 6.95%
-----------------------------------------------------------------------------------------
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
18
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold ETF Shares of Vanguard Long-Term Bond Index Fund. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in the prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Transaction Fee on Purchases and Redemptions $500/1/
--------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------------
Management Expenses 0.09%
--------------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------------
Other Expenses 0.02%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.11%
--------------------------------------------------------------------------------
1 If a Creation Unit is purchased or redeemed with a nonconforming basket, an
additional fee may apply. An investor buying or selling Long-Term Bond ETF
Shares on the secondary market will pay a commission to his or her broker in
an amount established by the broker.
|
The following example is intended to help retail investors compare the cost of
investing in Vanguard Long-Term Bond ETF with the cost of investing in other
funds. It illustrates the hypothetical expenses that such investors would incur
over various periods if they invest $10,000 in Long-Term Bond ETF. This example
assumes that Long-Term Bond ETF Shares provide a return of 5% a year and that
operating expenses remain the same. This example does not include the brokerage
commissions that retail investors will pay to buy and sell Long-Term Bond ETF
Shares. It also does not include the transaction fees on purchases and
redemptions of Creation Units, because these fees will not be imposed on retail
investors.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$11 $35 $62 $141
--------------------------------------------------------
|
The value of a Long-Term Bond ETF Creation Unit as of December 31, 2007, was
approximately $7.6 million. Assuming an investment of $7.6 million, payment of
the
19
standard $500 transaction fee applicable to both the purchase and redemption of
the Creation Unit, a 5% return each year, and no change in operating expenses,
the total costs of holding a Long-Term Bond ETF Creation Unit would be $9,564 if
the Creation Unit were redeemed after one year and $27,968 if redeemed after
three years.
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
----------------------------------------------------------------------------------------------------
Net Assets (all share classes of $2.8 billion
Vanguard Long-Term Bond Index Fund
----------------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
----------------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared and distributed monthly; capital gains,
if any, are distributed annually in December.
----------------------------------------------------------------------------------------------------
Inception Date Investor Shares-March 1, 1994
ETF Shares-April 3, 2007
----------------------------------------------------------------------------------------------------
Number of Long-Term Bond ETF 100,000
Shares in a Creation Unit
----------------------------------------------------------------------------------------------------
Vanguard Fund Number 927
----------------------------------------------------------------------------------------------------
CUSIP Number 921937793
----------------------------------------------------------------------------------------------------
AMEX Ticker Symbol BLV
----------------------------------------------------------------------------------------------------
|
20
INVESTING IN VANGUARD ETF(TM) SHARES
What Are Vanguard ETF Shares?
Vanguard ETF Shares are an exchange-traded class of shares issued by certain
Vanguard mutual funds. ETF Shares represent an interest in the portfolio of
stocks or bonds held by the issuing Fund. The following ETF Shares are offered
through this prospectus:
Fund ETF Shares Seeks to Track
-------------------------------------------------------------------------------
Vanguard Total Bond Market Vanguard Total Bond The overall taxable U.S.
Index Fund Market ETF bond market
-------------------------------------------------------------------------------
Vanguard Short-Term Bond Vanguard Short-Term Short-term U.S. bonds
Index Fund Bond ETF
-------------------------------------------------------------------------------
Vanguard Intermediate-Term Vanguard Intermediate- Intermediate-term U.S.
Bond Index Fund Term Bond ETF bonds
-------------------------------------------------------------------------------
Vanguard Long-Term Bond Vanguard Long-Term Long-term U.S. bonds
Index Fund Bond ETF
-------------------------------------------------------------------------------
|
In addition to ETF Shares, each Fund offers two or more conventional (not
exchange-traded) classes of shares. This prospectus, however, relates only to
ETF Shares.
How Are Vanguard ETF Shares Different From Conventional Mutual
Fund Shares?
Conventional mutual fund shares are bought from and redeemed with the issuing
fund for cash at a net asset value (NAV) typically calculated once a day. ETF
Shares,
by contrast, cannot be purchased from or redeemed with the issuing fund except
by or through Authorized Participants (defined below), and then only for an
in-kind basket of securities.
An organized trading market is expected to exist for ETF Shares, unlike
conventional mutual fund shares, because ETF Shares are listed for trading on a
national securities exchange. Investors can purchase and sell ETF Shares on the
secondary market through a broker. Secondary-market transactions occur not at
NAV, but at market prices that change throughout the day, based on the supply
of, and demand for, ETF Shares and on changes in the prices of the fund's
portfolio holdings.
The market price of a fund's ETF Shares will differ somewhat from the NAV of
those shares. The difference between market price and NAV is expected to be
small
most of the time, but in times of extreme market volatility the difference may
become significant.
21
How Do I Buy and Sell Vanguard ETF Shares?
Each Fund issues and redeems ETF Shares only in bundles of 100,000 shares. These
bundles are known as "Creation Units." To purchase or redeem a Creation Unit,
you must be an Authorized Participant or you must trade through a broker that is
an Authorized Participant. An Authorized Participant is a participant in the
Depository Trust Company that has executed a Participant Agreement with the
fund's Distributor. Vanguard will provide a list of Authorized Participants upon
request. Because Creation Units can be purchased only in exchange for a basket
of securities likely to cost millions of dollars, it is expected that only a
limited number of institutional investors will purchase and redeem ETF Shares
directly with an issuing fund.
Investors who cannot afford to purchase a Creation Unit can purchase ETF Shares
on the secondary market through a broker. Investors wishing to sell less than a
Creation Unit-size number of ETF Shares similarly can do so through a broker.
For information about buying or selling ETF Shares through a secondary-market
transaction, please contact your broker.
When you buy or sell ETF Shares on the secondary market, your broker will charge
a commission. You will also incur the cost of the "bid-asked spread," which is
the difference between the price a dealer will pay for a security and the
somewhat higher price at which the dealer will sell the same security. In
addition, because secondary-market transactions occur at market prices, you may
pay more than NAV when you buy ETF Shares, and receive less than NAV when you
sell those shares.
22
MORE ON THE FUNDS AND ETF SHARES
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. Look for this [FLAG] symbol
throughout the prospectus. It is used to mark detailed information about the
more significant risks that you would confront as a Fund shareholder. The Funds'
board of trustees, which oversees the Funds' management, may change investment
strategies or policies in the interest of shareholders without a shareholder
vote, unless those strategies or policies are designated as fundamental. Each
Fund's policy of investing at least 80% of its assets in bonds that are part of
the target index may be changed only upon 60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
23
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
24
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the dollar-weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, Inc., as of December 31, 2007.
25
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
---------------------------------------------------------------
Short-Term Bond Index Aa1 Aa1
---------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
Long-Term Bond Index Aa2 Aa2
---------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Interest Call/ Index
Income Rate Prepayment Credit Sampling
Fund Risk Risk Risk Risk Risk
-------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-------------------------------------------------------------------------------
Short-Term Bond Index High Low Low Low Low
-------------------------------------------------------------------------------
Intermediate-Term Bond Moderate Moderate Low Low Low
Index
-------------------------------------------------------------------------------
Long-Term Bond Index Low High Low Low Low
-------------------------------------------------------------------------------
|
26
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not hold
all issues in their target indexes, some of the issues (and issuers) that are
held will likely be overweighted (or underweighted) compared with the target
indexes. The maximum overweight (or underweight) is constrained at the issuer
level with the goal of producing well-diversified credit exposure in the
portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
-------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
-------------------------------------------------------------------
Short-Term Bond Index 816 1,821
-------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
-------------------------------------------------------------------
Long-Term Bond Index 777 1,083
-------------------------------------------------------------------
|
Types of bonds. The Total Bond Market ETF tracks the Lehman Brothers U.S.
Aggregate Bond Index; the Short-, Intermediate-, and Long-Term Bond ETFs track
subsets of that Index. Lehman Brothers U.S. Aggregate Bond Index measures the
total universe of taxable investment-grade fixed income securities in the United
States--including government, corporate, and international dollar-denominated
bonds, as well as mortgage-backed and asset-backed securities--all with
maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
---------------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
---------------------------------------------------------------------------------------------------
Short-Term Bond Index 68 27 0 5 0 100
---------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 52 41 0 6 1 100
---------------------------------------------------------------------------------------------------
Long-Term Bond Index 49 46 0 5 0 100
---------------------------------------------------------------------------------------------------
|
27
An explanation of each type of bond follows.
. U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
28
. International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In addition, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of its target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
29
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
[FLAG]
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Funds
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the Fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
. Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
. Add value when these instruments are attractively priced; or
. Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
30
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Special Risks of Exchange-Traded Shares
[FLAG]
ETF Shares are not individually redeemable. They can be redeemed with the
issuing Fund at NAV only in large blocks known as Creation Units. You would
incur brokerage costs in purchasing enough ETF Shares to constitute a Creation
Unit.
[FLAG]
The market price of ETF Shares may differ from net asset value. Vanguard ETF
Shares are listed for trading on a national securities exchange and can be
bought and sold on the secondary market at market prices. Although it is
expected that the market price of an ETF Share typically will approximate its
NAV, there may be times when the market price and the NAV differ significantly.
Thus, you may pay more than NAV when you buy ETF Shares on the secondary
market, and you may receive less than NAV when you sell those shares.
The market price of ETF Shares, like the price of any exchange-traded security,
includes a "bid-asked spread" charged by the exchange specialist and other
market-makers that cover the particular security. In times of severe market
disruption, the bid-asked spread can increase significantly. This means that
ETF Shares are most likely to be traded at a discount to NAV, and the discount
is likely to be greatest, when the price of ETF Shares is falling fastest--and
this may be the time that you most want to sell ETF Shares.
31
The following table shows the number of times the Funds' ETF Shares traded at a
premium or discount to NAV as well as the size of the premium or discount.
Premium/Discount Information as of the Most Recent Calendar Quarter Ended March 31, 2008
Market Price Above or Equal
to NAV Market Price Below NAV
-------------------------------------------------------------------------------------------
Basis Point Differential(1) Number Percentage Number Percentage
of Days of Total Days of Days of Total Days
-------------------------------------------------------------------------------------------
Vanguard Total Bond Market ETF (Beginning April 3, 2007)
-------------------------------------------------------------------------------------------
0-24.9 134 53.60% 2 0.80%
-------------------------------------------------------------------------------------------
25-49.9 96 38.40 0 0.00
-------------------------------------------------------------------------------------------
50-74.9 18 7.20 0 0.00
-------------------------------------------------------------------------------------------
75-100 0 0.00 0 0.00
-------------------------------------------------------------------------------------------
>100 0 0.00 0 0.00
-------------------------------------------------------------------------------------------
Total 248 99.20% 2 0.80%
-------------------------------------------------------------------------------------------
Vanguard Short-Term Bond ETF (Beginning April 3, 2007)
-------------------------------------------------------------------------------------------
0-24.9 214 85.60% 4 1.60%
-------------------------------------------------------------------------------------------
25-49.9 30 12.00 1 0.40
-------------------------------------------------------------------------------------------
50-74.9 1 0.40 0 0.00
-------------------------------------------------------------------------------------------
75-100 0 0.00 0 0.00
-------------------------------------------------------------------------------------------
>100 0 0.00 0 0.00
-------------------------------------------------------------------------------------------
Total 245 98.00% 5 2.00%
-------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond ETF (Beginning April 3, 2007)
-------------------------------------------------------------------------------------------
0-24.9 119 47.60% 2 0.80%
-------------------------------------------------------------------------------------------
25-49.9 95 38.00 0 0.00
-------------------------------------------------------------------------------------------
50-74.9 28 11.20 0 0.00
-------------------------------------------------------------------------------------------
75-100 5 2.00 0 0.00
-------------------------------------------------------------------------------------------
>100 0 0.00 1 0.40
-------------------------------------------------------------------------------------------
Total 247 98.80% 3 1.20%
-------------------------------------------------------------------------------------------
1 One basis point equals 1/100 of 1%.
|
32
Premium/Discount Information as of the Most Recent Calendar Quarter Ended March 31, 2008
Market Price Above or Equal
to NAV Market Price Below NAV
-------------------------------------------------------------------------------------------
Basis Point Differential(1) Number Percentage Number Percentage
of Days of Total Days of Days of Total Days
-------------------------------------------------------------------------------------------
Vanguard Long-Term Bond ETF (Beginning April 3, 2007)
-------------------------------------------------------------------------------------------
0-24.9 86 34.40% 8 3.20%
-------------------------------------------------------------------------------------------
25-49.9 115 46.00 2 0.80
-------------------------------------------------------------------------------------------
50-74.9 36 14.40 0 0.00
-------------------------------------------------------------------------------------------
75-100 2 0.80 0 0.00
-------------------------------------------------------------------------------------------
>100 0 0.00 1 0.40
-------------------------------------------------------------------------------------------
Total 239 95.60% 11 4.40%
-------------------------------------------------------------------------------------------
1 One basis point equals 1/100 of 1%.
|
The following table shows the cumulative (not annual) total returns of each
Fund's ETF Shares, based on the shares' NAV and market price, and the Fund's
target index. Please note that the performance shown is for less than a calendar
year.
Cumulative Total Returns as of the Most Recent Calendar Quarter Ended March 31, 2008
Since
Inception/1/
--------------------------------------------------------------------------------
Vanguard Total Bond Market ETF
--------------------------------------------------------------------------------
Return Based on NAV 7.77%
--------------------------------------------------------------------------------
Return Based on Market Price 8.06
--------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index 7.68
--------------------------------------------------------------------------------
Vanguard Short-Term Bond ETF
--------------------------------------------------------------------------------
Return Based on NAV 8.84%
--------------------------------------------------------------------------------
Return Based on Market Price 9.30
--------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government/Credit Bond Index 8.74
--------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond ETF
--------------------------------------------------------------------------------
Return Based on NAV 9.51%
--------------------------------------------------------------------------------
Return Based on Market Price 10.41
--------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index 9.23
--------------------------------------------------------------------------------
1 Since-inception returns are from April 3, 2007--the inception date of the ETF
Shares--through March 31, 2008.
|
33
Cumulative Total Returns as of the Most Recent Calendar Quarter Ended March 31, 2008
Since
Inception/1/
--------------------------------------------------------------------------------
Vanguard Long-Term Bond ETF
-------------------------------------------------------------------------------
Return Based on NAV 7.08%
-------------------------------------------------------------------------------
Return Based on Market Price 7.48
-------------------------------------------------------------------------------
Lehman Brothers U.S. Long Government/Credit Index 7.68
-------------------------------------------------------------------------------
1 Since-inception returns are from April 3, 2007--the inception date of the ETF
Shares--through March 31, 2008.
|
Note: Vanguard's website will show the prior day's closing NAV and closing
market price for each Fund's ETF Shares. The website also will disclose how
frequently each Fund's ETF Shares traded at a premium or discount to NAV (based
on closing NAVs and market prices) and the magnitudes of such premiums and
discounts.
[FLAG]
An active trading market may not exist. Although Vanguard ETF Shares are listed
on a national securities exchange, it is possible that an active trading market
may not be maintained.
[FLAG]
Trading may be halted. Trading of Vanguard ETF Shares on a national securities
exchange will be halted whenever trading in equity securities generally is
halted by the activation of marketwide "circuit breakers," which are tied to
large decreases in the Dow Jones Industrial Average. Trading of ETF Shares also
will be halted if (1) the shares are delisted from the listing exchange without
first being listed on another exchange, or (2) exchange officials determine
that such action is appropriate in the interest of a fair and orderly market or
to protect investors.
Note: If trading of ETF Shares on the listing exchange is halted, eligible
investors (see the following section) will still be able to purchase Creation
Units of ETF Shares directly from an issuing Fund and redeem such units with
the Fund.
Purchasing Vanguard ETF Shares From an Issuing Fund
You can purchase ETF Shares from an issuing Fund if you meet the following
criteria and comply with the following procedures:
. Eligible Investors. To purchase ETF Shares from a Fund, you must be an
Authorized Participant or you must purchase through a broker that is an
Authorized Participant. An Authorized Participant is a participant in the
Depository Trust Company (DTC) that has executed a Participant Agreement with
the Fund's Distributor. Most Authorized Participants are expected to be
brokerage firms.
34
. Creation Units. You must purchase ETF Shares in large blocks known as
"Creation Units." The number of ETF Shares in a Creation Unit is 100,000. The
Funds will not issue fractional Creation Units.
. In-Kind Creation Basket. To purchase a Creation Unit-size block of ETF Shares,
you must deposit with an issuing Fund a basket of securities. Each business day,
after the close of trading on the AMEX, the Funds' advisor will make available,
on the National Securities Clearing Corporation (NSCC) bulletin board, a list
identifying the name and number of shares of each security to be included in the
next business day's creation basket (each, a "Deposit Security"). When
purchasing Creation Units of Total Bond Market ETF, you will be required to
tender cash in lieu of any Deposit Security that is a mortgage TBA transaction,
except as described below. In addition, each Fund reserves the right to permit
or require purchasers to tender a nonconforming basket, including a basket that
contains cash in lieu of any Deposit Security.
. Late-Day Purchases of Total Bond Market ETF. The advisor reserves the right
not to include cash in the Total Bond Market ETF creation basket in place of
mortgage TBAs, but rather to substitute Treasury securities of equivalent value
and duration as the mortgage TBAs. The advisor would exercise this right (1)
only for purchase orders placed after 2 p.m., Eastern time, or, on days when the
Bond Market Association recommends an early bond market close (typically the day
before a holiday or holiday weekend), two hours before the recommended closing,
and (2) only when, in the advisor's reasonable discretion, accepting cash could
have a dilutive effect on the Fund's NAV. In any situation in which the advisor
elects to substitute Treasury securities for mortgage TBAs, the advisor will
promptly notify the investor placing the order, and the investor will have an
opportunity to withdraw the order before it is accepted. Once the advisor
informs a prospective purchaser that the creation basket must include Treasury
securities rather than mortgage TBAs, it will do so for all subsequent purchase
orders that day.
. Purchase Balancing Amount. In addition to the in-kind deposit of securities,
you will either pay to, or receive from, the Fund an amount of cash (the
Purchase Balancing Amount) equal to the difference between the NAV of a Creation
Unit and the value of the Deposit Securities. The Purchase Balancing Amount
ensures that the consideration paid by an investor for a Creation Unit is
exactly equal to the value of the Creation Unit. The Funds' advisor will
publish, on a daily basis, information about the previous day's Purchase
Balancing Amount. You also must pay a transaction fee in cash. The Purchase
Balancing Amount and the transaction fee, taken together, are referred to as the
"Cash Component."
. Placement and Timing of Purchase Orders. A purchase order must be received by
the Funds' Distributor prior to the close of regular trading on the New York
Stock Exchange (generally 4 p.m., Eastern time) on the day the order is placed,
and all other procedures set forth in the Participant Agreement must be
followed, in order for you to receive the NAV determined on that day.
35
. Transaction Fee on Purchase of Creation Units. Each Fund imposes a transaction
fee in the amount of $500 on each purchase of Creation Units, regardless of the
number of units purchased. For purchases of Total Bond Market ETF with the
prescribed basket (which includes cash in lieu of each Deposit Security that is
a mortgage TBA transaction), an additional variable charge will apply in an
amount approximately equal to the transaction costs the Fund expects to incur
when purchasing the mortgage TBA securities that are part of the basket. The
variable charge is expected to be the sum of the bid price market values of the
TBAs multiplied by 0.05% (or 5 basis points), but could be higher or lower,
depending on market conditions. The variable charge will not be imposed on
late-day trades in Total Bond Market ETF in which Treasury securities are
substituted for mortgage TBAs. Investors permitted to tender a nonconforming
creation basket for any Fund may be subject to an additional charge commensurate
with the cost to the Fund. The transaction fee (paid to the Fund, not to
Vanguard or a third party) protects existing shareholders of the Fund from the
costs associated with issuing Creation Units.
Redeeming Vanguard ETF Shares With an Issuing Fund
The redemption process is essentially the reverse of the purchase process.
. Eligible Investors. To redeem ETF Shares with a Fund, you must be an
Authorized Participant or you must redeem through a broker that is an Authorized
Participant.
. Creation Units. To redeem ETF Shares with a Fund, you must tender the shares
in Creation Unit-size blocks.
. In-Kind Redemption Proceeds. Redemption proceeds will be paid in kind with a
basket of securities (Redemption Securities). In most cases, the Redemption
Securities you receive will be the same as the Deposit Securities required of
investors purchasing Creation Units on the same day. There will be times,
however, when the Deposit and Redemption Securities differ. The name and number
of the Redemption Securities in the redemption basket will be available on the
NSCC bulletin board. When satisfying redemption requests, the Total Bond Market
ETF intends to substitute, in lieu of each Redemption Security that is a
mortgage TBA transaction, cash in an amount equal to the price of the TBA. In
addition, each Fund reserves the right to deliver a nonconforming redemption
basket.
36
. Late-Day Redemptions of Total Bond Market ETF. The advisor reserves the right
not to include cash in the Total Bond Market ETF redemption basket in place of
mortgage TBAs, but rather to substitute Treasury securities of equivalent value
and duration as the mortgage TBAs. The advisor would exercise this right (1)
only for redemption orders placed after 2 p.m., Eastern time, or, on days when
the Bond Market Association recommends an early bond market close (typically the
day before a holiday or holiday weekend), two hours before the recommended
closing, and (2) only when, in the advisor's reasonable discretion, delivering
cash could have a dilutive effect on the Fund's NAV. In any situation in which
the advisor elects to substitute Treasury securities for mortgage TBAs, the
advisor will promptly notify the investor placing the order, and the investor
will have an opportunity to withdraw the order before it is accepted. Once the
advisor informs a redeeming shareholder that the redemption basket will include
Treasury securities rather than mortgage TBAs, it will do so for all subsequent
redemption orders that day.
. Redemption Balancing Amount. Depending on whether the NAV of a Creation Unit
is higher or lower than the value of the Redemption Securities, you will either
receive from or pay to the Fund a Redemption Balancing Amount in cash. If you
are due to receive a Redemption Balancing Amount, the amount you actually
receive will be reduced by the amount of the applicable transaction fee.
. Placement and Timing of Redemption Orders. A redemption order is deemed
received on the date of transmittal if it is received by Vanguard prior to the
close of regular trading on the New York Stock Exchange on that date (generally
4 p.m., Eastern time), and if all other procedures set forth in the
Participation Agreement
are followed.
. Transaction Fee on Redemption of Creation Units. Each Fund imposes a
transaction fee in the amount of $500 on each redemption of Creation Units,
regardless of the number of units redeemed. As with the transaction fee on
purchases, the transaction fee on redemptions (paid to the Fund, not to Vanguard
or a third party) protects existing shareholders of the Fund from the costs
associated with redeeming Creation Units. For Creation Unit redemptions, unlike
purchases, the Total Bond Market ETF does not assess a variable charge above the
standard $500 fee, nor do any of the Funds impose an additional charge on
investors who receive a nonconforming redemption basket.
Purchasing and Selling Vanguard ETF Shares on the Secondary Market
You can buy and sell ETF Shares on the secondary market in the same way you buy
and sell any other exchange-traded security--through a broker. In most cases,
the broker will charge you a commission to execute the transaction. The price at
which you buy or sell ETF Shares (i.e., the market price) may be more or less
than the NAV of the shares. Unless imposed by your broker, there is no minimum
dollar amount you must invest and no minimum number of ETF Shares you must buy.
37
Frequent Trading and Market-Timing
Unlike frequent trading of a Vanguard fund's conventional (i.e., not
exchange-traded) classes of shares, frequent trading of ETF Shares does not
disrupt portfolio management, increase the fund's trading costs, lead to
realization of capital gains, or otherwise harm fund shareholders. The vast
majority of trading in ETF Shares occurs on the secondary market. Because these
trades do not involve the issuing fund directly, they do not harm the fund or
its shareholders. A few institutional investors are authorized to purchase and
redeem ETF Shares directly with the issuing fund. Because these trades are
effected in-kind (i.e., for securities and not for cash), they do not cause any
of the harmful effects (as previously noted) that may result from frequent cash
trades. Moreover, the issuing fund imposes transaction fees on in-kind purchases
and redemptions of ETF Shares to cover the custodial and other costs incurred by
the fund in effecting in-kind trades. These fees increase if an investor
substitutes cash in part or in whole for securities, reflecting the fact that
the fund's trading costs increase in those circumstances. For these reasons, the
board of trustees of each fund that issues ETF Shares has determined that it is
not necessary to adopt policies and procedures to detect and deter frequent
trading and market-timing of ETF Shares.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
Precautionary Notes
A precautionary note to retail investors: The DTC or its nominee will be the
registered owner of all outstanding ETF Shares. Your ownership of ETF Shares
will be shown on the records of the DTC and the DTC Participant broker through
which you hold the shares. Vanguard will not have any record of your ownership.
Your account information will be maintained by your broker, which will provide
you with account statements, confirmations of your purchases and sales of ETF
Shares, and tax information. Your broker also will be responsible for
distributing income and capital gains distributions and for ensuring that you
receive shareholder reports and other communications from the fund whose ETF
Shares you own. You will receive other services (e.g., dividend reinvestment and
average cost information) only if your broker offers these services.
38
A precautionary note to purchasers of Creation Units: You should be aware of
certain legal risks unique to investors purchasing Creation Units directly from
the issuing Fund.
Because new ETF Shares may be issued on an ongoing basis, a "distribution" of
ETF Shares could be occurring at any time. Certain activities that you perform
as a dealer could, depending on the circumstances, result in your being deemed a
participant in the distribution, in a manner that could render you a statutory
underwriter and subject you to the prospectus delivery and liability provisions
of the Securities Act of 1933. For example, you could be deemed a statutory
underwriter if you purchase Creation Units from the issuing Fund, break them
down into the constituent ETF Shares, and sell those shares directly to
customers, or if you choose to couple the creation of a supply of new ETF Shares
with an active selling effort involving solicitation of secondary-market demand
for ETF Shares. Whether a person is an underwriter depends upon all of the facts
and circumstances pertaining to that person's activities, and the examples
mentioned here should not be considered a complete description of all the
activities that could cause you to be deemed an underwriter.
Dealers who are not "underwriters" but are participating in a distribution (as
opposed to engaging in ordinary secondary-market transactions), and thus dealing
with ETF Shares as part of an "unsold allotment" within the meaning of Section
4(3)(C) of the Securities Act, will be unable to take advantage of the
prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A precautionary note to shareholders redeeming Creation Units: An Authorized
Participant that is not a "qualified institutional buyer" as defined in Rule
144A under the Securities Act of 1933 will not be able to receive, as part of
the redemption basket, restricted securities eligible for resale under Rule
144A. (For this reason, the Funds do not intend to include 144A securities in a
redemption basket.)
A precautionary note to investment companies: For purposes of the Investment
Company Act of 1940, Vanguard ETF Shares are issued by registered investment
companies, and the acquisition of such shares by other investment companies is
subject to the restrictions of Section 12(d)(1) of that Act, except as permitted
by an SEC exemptive order that allows registered investment companies to invest
in the issuing fund beyond the limits of Section 12(d)(1), subject to certain
terms and conditions.
A note on unusual circumstances: Vanguard reserves the right to reject any
purchase request at any time, for any reason, and without notice. Vanguard funds
can stop selling shares or postpone payment of redemption proceeds at times when
the New York Stock Exchange is closed or under any emergency circumstances as
determined by the Securities and Exchange Commission.
39
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
40
Plain Talk/(R)/ About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately $1 trillion in assets. Vanguard manages the Funds on an at-cost
basis, subject to the supervision and oversight of the trustees and officers of
the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
41
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the
Funds are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); managed the Intermediate-Term Bond Index Fund since its
inception (co-managed since 2008); and managed the Long-Term Bond Index Fund
since 2005 ( co-managed since 2008). Education: B.S., University of Illinois;
M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; has managed the Short-Term Bond Index
Fund since 2005; and has co-managed the Total Bond Market Index and Long-Term
Bond Index Funds since 2008. Education: B.S., The Pennsylvania State University;
M.B.A., The Wharton School of the University of Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has managed
investment portfolios since 2005; and has co-managed the Intermediate-Term Bond
Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh
University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
Dividends, Capital Gains, and Taxes
Fund Distributions
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. For holders of the Fund's ETF Shares, income dividends are declared
and distributed monthly. Capital gains distributions generally occur annually in
December. In addition, the Funds may occasionally be required to make
supplemental distributions at some other time during the year.
42
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
Reinvestment of Distributions
In order to reinvest dividend and capital gains distributions, investors in a
Fund's ETF Shares must hold their shares at a broker that offers a reinvestment
service (either the broker's own service or a service made available by a third
party, such as the broker's outside clearing firm or the Depository Trust
Company). If a reinvestment service is available and used, distributions of both
income and capital gains will automatically be reinvested in additional whole
and fractional ETF Shares of the Fund. If a reinvestment service is not
available, investors would receive their distributions in cash. To determine
whether a reinvestment service is available and whether there is a commission or
other charge for using this service, consult your broker.
As with all exchange-traded funds, reinvestment of dividend and capital gains
distributions in additional ETF Shares will occur four business days or more
after the ex-dividend date (the date when a distribution of dividends or capital
gains is deducted from the price of the Fund's shares). The exact number of days
depends on your broker. During that time, the amount of your distribution will
not be invested in the Fund and therefore will not share in the Fund's income,
gains, and losses.
Basic Tax Points
Investors in taxable accounts should be aware of the following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional ETF Shares.
. Distributions declared in December--if paid to you by the end of January--are
taxable for federal income tax purposes as if received in December.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes.
. Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned
ETF Shares.
43
. Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
. A sale of ETF Shares is a taxable event. This means that you may have a
capital gain to report as income, or a capital loss to report as a deduction,
when you complete your federal income tax return.
. Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale of ETF Shares, may be subject to state and local
income taxes. Depending on your state's rules, however, any dividends
attributable to interest earned on direct obligations of the U.S. government may
be exempt from state and local taxes. Vanguard will notify you each year how
much, if any, of your dividends may qualify for this exemption.
Note: This prospectus provides general tax information only. If you are
investing through a tax-deferred retirement account, such as an IRA, special tax
rules apply. Please consult your tax advisor for detailed information about any
tax consequences for you.
Daily Pricing
The net asset value, or NAV, of each Fund's ETF Shares is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class.
Remember: If you buy or sell ETF Shares on the secondary market, you will pay or
receive the market price, which may be higher or lower than NAV. Your
transaction will be priced at NAV only if you purchase or redeem your ETF Shares
in Creation Unit blocks.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
44
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard's website will show the previous day's closing NAV and closing market
price for each Fund's ETF Shares. The previous day's closing market price also
will be published in the business section of most major newspapers.
Financial Highlights
The following financial highlights tables are intended to help you understand
the ETF Shares' financial performance for the periods shown, and certain
information reflects financial results for a single ETF Share. The total returns
in each table represent the rate that an investor would have earned or lost each
period on an investment in the ETF Shares (assuming reinvestment of all
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, whose report--along with each Fund's financial statements--is
included in the Funds' most recent annual report to shareholders. To receive a
free copy of the latest annual or semiannual report, you may access a report
online at www.vanguard.com, or you may contact Vanguard by telephone or by mail.
45
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's ETF Shares as an
example. The ETF Shares began fiscal year ended 2007 with a net asset value
(price) of $74.95 per share. During the year, each ETF Share earned $2.351
from investment income (interest) and $1.66 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $2.351 per share in the form of dividend distributions.
The share price at the end of the year was $76.61, reflecting earnings of
$4.011 per share and distributions of $2.351 per share. This was an increase
of $1.66 per share (from $74.95 at the beginning of the year to $76.61 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 5.45% for the year.
As of December 31, 2007, the ETF Shares had approximately $1.1 billion in net
assets. For the year, the annualized expense ratio was 0.11% ($1.10 per
$1,000 of net assets), and the annualized net investment income amounted to
5.10% of average net assets. The Fund sold and replaced securities valued at
an annualized rate of 54% of its net assets.
46
Total Bond Market ETF
April 3, 2007/1/ to
December 31, 2007
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $74.95
--------------------------------------------------------------------------------
Investment Operations
--------------------------------------------------------------------------------
Net Investment Income 2.351
--------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 1.660
--------------------------------------------------------------------------------
Total from Investment Operations 4.011
--------------------------------------------------------------------------------
Distributions
--------------------------------------------------------------------------------
Dividends from Net Investment Income (2.351)
--------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
--------------------------------------------------------------------------------
Total Distributions (2.351)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $76.61
================================================================================
Total Return 5.45%
================================================================================
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,095
--------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11%/2/
--------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.10%/2/
--------------------------------------------------------------------------------
Turnover Rate/3/ 54%
================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
47
Short-Term Bond ETF
April 3, 2007/1/ to
December 31, 2007
----------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $74.95
----------------------------------------------------------------------------------
Investment Operations
----------------------------------------------------------------------------------
Net Investment Income 2.249
----------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 1.930
----------------------------------------------------------------------------------
Total from Investment Operations 4.179
----------------------------------------------------------------------------------
Distributions
----------------------------------------------------------------------------------
Dividends from Net Investment Income (2.249)
----------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
----------------------------------------------------------------------------------
Total Distributions (2.249)
----------------------------------------------------------------------------------
Net Asset Value, End of Period $76.88
==================================================================================
Total Return 5.67%
==================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $407
----------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11%/2/
----------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.65%/2/
----------------------------------------------------------------------------------
Turnover Rate/3/ 79%
==================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
48
Intermediate-Term Bond ETF
April 3, 2007/1/ to
December 31, 2007
------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $74.90
------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------
Net Investment Income 2.389
------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 2.060
------------------------------------------------------------------------------------
Total from Investment Operations 4.449
------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------
Dividends from Net Investment Income (2.389)
------------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
------------------------------------------------------------------------------------
Total Distributions (2.389)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $76.96
====================================================================================
Total Return 6.06%
====================================================================================
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $169
------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11%(2)
------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.81%(2)
------------------------------------------------------------------------------------
Turnover Rate(3) 72%
====================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
49
Long-Term Bond ETF
April 3, 2007/1/ to
December 31, 2007
------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $74.90
------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------
Net Investment Income 2.740
------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 1.480
------------------------------------------------------------------------------------
Total from Investment Operations 4.220
------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------
Dividends from Net Investment Income (2.740)
------------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
------------------------------------------------------------------------------------
Total Distributions (2.740)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $76.38
====================================================================================
Total Return 5.77%
====================================================================================
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $84
------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11%(2)
------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.41%(2)
------------------------------------------------------------------------------------
Turnover Rate(3) 62%
====================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
Vanguard, Connect with Vanguard, Plain Talk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark owned by CFA
Institute. All other marks are the exclusive property of their respective
owners.
Vanguard ETFs are not sponsored, endorsed, sold, or promoted by Lehman Brothers.
Lehman makes no representation or warranty, express or implied, to the owners of
Vanguard ETFs or any member of the public regarding the advisability of
investing in securities generally or in Vanguard ETFs particularly or the
ability of the Lehman Index to track general bond market performance. Lehman
hereby expressly disclaims all warranties of merchantability and fitness for a
particular purpose with respect to the Lehman index and any data included
therein. Lehman's only relationship to Vanguard and Vanguard ETFs is the
licensing of the Lehman Index which is determined, composed, and calculated by
Lehman without regard to Vanguard or Vanguard ETFs. Lehman is not responsible
for, and has not participated in the determination of the timing of, prices of,
or quantities of Vanguard ETFs to be issued.
Source of index data: Lehman Brothers Global Family of Indices. Copyright 2008,
Lehman Brothers. All right reserved.
50
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Authorized Participant. Institutional investors that are permitted to purchase
Creation Units directly from, and redeem Creation Units directly with, the fund.
To be an Authorized Participant, an entity must be a participant in the
Depository Trust Company and must enter into an agreement with the fund's
Distributor.
Bid-Asked Spread. The difference between what a buyer is willing to bid (pay)
for a security and the seller's asking (offer) price.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Circuit Breaker. A rule that requires a halt in trading in the U.S. stock
markets for a specific period of time when the Dow Jones Industrial Average
declines by a specified percentage during the course of a trading day.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Creation Unit. A large block of a specified number of ETF Shares. Authorized
Participants may purchase and redeem ETF Shares from the fund only in Creation
Unit-size aggregations.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
ETF Shares. A class of exchange-traded shares issued by certain Vanguard mutual
funds. ETF Shares can be bought and sold continuously throughout the day at
market prices.
Ex-Dividend Date. The date when a distribution of dividends and/or capital
gains is deducted from the price of a mutual fund or stock. On the ex-dividend
date, the share price drops by the amount of the distribution (plus or minus any
market activity).
51
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
52
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond ETFs, the following
documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI for the issuing Funds provides more detailed information about the
Funds' ETF Shares.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about Vanguard ETF Shares, please visit
www.vanguard.com or contact us as follows:
The Vanguard Group
Institutional Investor Information
P.O. Box 2900
Valley Forge, PA 19482-2600
Telephone: 866-499-8473
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Funds are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
U.S. Pat. No. 6,879,964 B2 ; 7,337,138
Vanguard Marketing Corporation, Distributor.
P984 042008
Vanguard/(R)/ Bond Index Funds
> Prospectus
Signal(TM) Shares
April 25, 2008
[VANGUARD SHIP LOGO/R/]
Vanguard Total Bond Market Index Fund
Vanguard Short-Term Bond Index Fund
Vanguard Intermediate-Term Bond Index Fund
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Contents
----------------------------------------------------------------------------------------
Vanguard Fund Profiles 1 Investing With Vanguard 37
----------------------------------------------------------------------------------------
Total Bond Market Index Fund 1 Purchasing Shares 37
----------------------------------------------------------------------------------------
Short-Term Bond Index Fund 6 Converting Shares 40
----------------------------------------------------------------------------------------
Intermediate-Term Bond Index Fund 11 Redeeming Shares 42
----------------------------------------------------------------------------------------
Investing in Index Funds 16 Exchanging Shares 45
----------------------------------------------------------------------------------------
More on the Funds 17 Frequent-Trading Limits 46
----------------------------------------------------------------------------------------
The Funds and Vanguard 27 Other Rules You Should Know 47
----------------------------------------------------------------------------------------
Investment Advisor 28 Fund and Account Updates 51
----------------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes 29 Contacting Vanguard 53
----------------------------------------------------------------------------------------
Share Price 31 Glossary of Investment Terms 55
----------------------------------------------------------------------------------------
Financial Highlights 32
----------------------------------------------------------------------------------------
|
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
This prospectus offers the Funds' Signal Shares, which are generally for
investors who invest a minimum of $1 million. A separate prospectus offers
Investor Shares as well as Admiral(TM) Shares. Another prospectus offers
Institutional Shares, which are generally for investors who do not require
special employee benefit services and who invest a minimum of $5 million.
The Funds' separate share classes have different expenses; as a result, their
investment performances will differ.
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency.
FUND PROFILE--VANGUARD TOTAL BOND MARKET INDEX FUND
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies, see
More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
. Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows the performance of the Fund's
Signal Shares in their first full calendar year. The table shows how the average
annual total returns of the Signal Shares compare with those of the Fund's
target index. Keep in mind that the Fund's past performance (before and after
taxes) does not indicate how the Fund will perform in the future.
Annual Total Returns--Signal Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2007 7.02%
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.10% (quarter ended December 31, 2007), and the lowest return for a
quarter was -0.63% (quarter ended June 30, 2007).
2
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year Inception/1/
------------------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Signal Shares
------------------------------------------------------------------------------------------------------
Return Before Taxes 7.02% 6.94%
------------------------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.13 5.06
------------------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.51 4.80
------------------------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees, expenses, or taxes) 6.97% 6.81%
------------------------------------------------------------------------------------------------------
1 Since- inception returns are from September 1, 2006--the inception date of
the Signal Shares--through December 31, 2007.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Signal Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
3
Shareholder Fees
(Fees paid directly from your investment)
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
------------------------------------------------------------------------
Management Expenses 0.09%
------------------------------------------------------------------------
12b-1 Distribution Fee None
------------------------------------------------------------------------
Other Expenses 0.01%
------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
------------------------------------------------------------------------
1 A portfolio transaction fee of 0.18% may apply to aggregate purchases of more
than $500 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Signal Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
4
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $55.8 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--December 11, 1986
Signal Shares--September 1, 2006
-----------------------------------------------------------------------------------------------
Minimum Investment $1 million
-----------------------------------------------------------------------------------------------
Conversion Features May be converted to Investor Shares if you no longer meet
eligibility requirements
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation TotBdSgl
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 1351
-----------------------------------------------------------------------------------------------
CUSIP Number 921937868
-----------------------------------------------------------------------------------------------
Ticker Symbol VBTSX
-----------------------------------------------------------------------------------------------
|
5
FUND PROFILE--VANGUARD SHORT-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 1-5 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 1 and 5 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally does not exceed 3 years and, as of December 31, 2007, was 2.7 years.
For additional information on the Fund's investment strategies, see More on the
Funds.
Primary Risks
The Fund is designed for investors with a low tolerance for risk, but you could
still lose money by investing in it. The Fund's performance could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be low for the Fund
because it invests mainly in short-term bonds, whose prices are much less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally high for short-term bond
funds, so investors should expect the Fund's monthly income to fluctuate.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
6
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's Signal Shares, the information presented in the bar
chart and table reflects the performance of the Admiral Shares of Vanguard Bond
Index. (Admiral Shares are offered through a separate prospectus.) Performance
based on net asset value for the Signal Shares Shares would be substantially
similar, because the expense ratio of the Signal Shares is the same as that of
the Admiral Shares and because both share classes constitute an investment in
the same portfolio of securities. Therefore, the returns of the Signal Shares
should closely match those of the Admiral Shares. The bar chart shows how the
performance of the Fund's Admiral Shares has varied from one calendar year to
another over the periods shown. The table shows how the average annual total
returns of the Fund's Admiral Shares compare with those of the Fund's target
index. Keep in mind that the Fund's past performance (before and after taxes)
does not indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 6.15%
2003 3.43
2004 1.77
2005 1.38
2006 4.16
2007 7.31
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 2.80% (quarter ended September 30, 2002), and the lowest return for
a quarter was -1.78% (quarter ended June 30, 2004).
7
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
--------------------------------------------------------------------------------------------
Vanguard Short-Term Bond Fund Admiral Shares
--------------------------------------------------------------------------------------------
Return Before Taxes 7.31% 3.59% 3.74%
--------------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.57 2.21 2.22
--------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.71 2.25 2.28
--------------------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government Bond Index
(reflects no deduction for fees, expenses, or taxes) 7.27% 3.60% 4.07%
--------------------------------------------------------------------------------------------
1 Since- inception returns are from November 12, 2001--the inception date of
the Admiral Shares--through December 31, 2007.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Signal Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
8
Shareholder Fees
(Fees paid directly from your investment)
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
------------------------------------------------------------------------
Management Expenses 0.09%
------------------------------------------------------------------------
12b-1 Distribution Fee None
------------------------------------------------------------------------
Other Expenses 0.01%
------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
------------------------------------------------------------------------
1 A portfolio transaction fee of 0.15% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Signal Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
9
Additional Information
As of December 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes) $6.5 billion
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc. Valley Forge, Pa., since inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Signal Shares--March 30, 2007
----------------------------------------------------------------------------------------------
Minimum Initial Investment $1 million
----------------------------------------------------------------------------------------------
Conversion Features May be converted to Investor Shares if you no longer meet
eligibility requirements
----------------------------------------------------------------------------------------------
Newspaper Abbreviation STBondSgl
----------------------------------------------------------------------------------------------
Vanguard Fund Number 1349
----------------------------------------------------------------------------------------------
CUSIP Number 921937850
----------------------------------------------------------------------------------------------
Ticker Symbol VBSSX
----------------------------------------------------------------------------------------------
|
10
FUND PROFILE--VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, see More
on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
11
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's Signal Shares, the information presented in the bar
chart and table reflects the performance of the Admiral Shares of Vanguard Bond
Index. (Admiral Shares are offered through a separate prospectus.) Performance
based on net asset value for the Signal Shares Shares would be substantially
similar, because the expense ratio of the Signal Shares is the same as that of
the Admiral Shares and because both share classes constitute an investment in
the same portfolio of securities. Therefore, the returns of the Signal Shares
should closely match those of the Admiral Shares. The bar chart shows how the
performance of the Fund's Admiral Shares has varied from one calendar year to
another over the periods shown. The table shows how the average annual total
returns of the Fund's Admiral Shares compare with those of the Fund's target
index. Keep in mind that the Fund's past performance (before and after taxes)
does not indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 10.91%
2003 5.70
2004 5.30
2005 1.82
2006 3.98
2007 7.70
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 5.78% (quarter ended September 30, 2002), and the lowest return for
a quarter was -3.86% (quarter ended June 30, 2004).
12
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
--------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Admiral Shares
--------------------------------------------------------------------------------------------
Return Before Taxes 7.70% 4.88% 5.26%
--------------------------------------------------------------------------------------------
Return After Taxes on Distributions 5.83 3.05 3.33
--------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 4.95 3.11 3.35
--------------------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees, expenses, or taxes) 7.55% 4.87% 5.54%
--------------------------------------------------------------------------------------------
1 Since- inception returns are from November 12, 2001--the inception date of
the Admiral Shares--through December 31, 2007.
|
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Signal Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
13
Shareholder Fees
(Fees paid directly from your investment)
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
------------------------------------------------------------------------
Redemption Fee None
------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
------------------------------------------------------------------------
Management Expenses 0.10%
------------------------------------------------------------------------
12b-1 Distribution Fee None
------------------------------------------------------------------------
Other Expenses 0.00%
------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
------------------------------------------------------------------------
1 A portfolio transaction fee of 0.23% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Signal Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
14
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.2 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Signal Shares--June 4, 2007
-----------------------------------------------------------------------------------------------
Minimum Initial Investment $1 million
-----------------------------------------------------------------------------------------------
Conversion Features May be converted to Investor Shares if you no longer meet
eligibility requirements
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation ITBondSgl
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 1350
-----------------------------------------------------------------------------------------------
CUSIP Number 921937843
-----------------------------------------------------------------------------------------------
Ticker Symbol VIBSX
-----------------------------------------------------------------------------------------------
|
15
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." An index is an unmanaged group of securities whose
overall performance is used as a standard to measure the investment performance
of a particular market. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror the performance of the target
index, for better or worse. However, an index fund does not always perform
exactly like its target index. For example, like all mutual funds, index funds
have operating expenses and transaction costs. Market indexes do not, and
therefore will usually have a slight performance advantage over funds that track
them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus dealer markups and other transaction costs--to a minimum.
16
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Each Fund's policy
of investing at least 80% of its assets in bonds that are part of the target
index may be changed only upon 60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
17
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
18
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the dollar-weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, Inc., as of December 31, 2007.
19
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
--------------------------------------------------------------
Short-Term Bond Index Aa1 Aa1
--------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
--------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Interest Call/ Index
Income Rate Prepayment Credit Sampling
Fund Risk Risk Risk Risk Risk
-------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-------------------------------------------------------------------------------
Short-Term Bond Index High Low Low Low Low
-------------------------------------------------------------------------------
Intermediate-Term Bond Moderate Moderate Low Low Low
Index
-------------------------------------------------------------------------------
|
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not hold
all issues in their target indexes, some of the issues (and issuers) that are
held will likely be overweighted (or underweighted) compared with the target
indexes. The
20
maximum overweight (or underweight) is constrained at the issuer level with the
goal of producing well-diversified credit exposure in the portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
-------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
-------------------------------------------------------------------
Short-Term Bond Index 816 1,821
-------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
-------------------------------------------------------------------
|
Types of bonds. The Total Bond Market Index Fund tracks the Lehman Brothers
U.S. Aggregate Bond Index; the Short- and Intermediate-Term Bond Funds track
subsets of that Index. Lehman Brothers U.S. Aggregate Bond Index measures the
total universe of taxable investment-grade fixed income securities in the United
States--including government, corporate, and international dollar-denominated
bonds, as well as mortgage-backed and asset-backed securities--all with
maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
---------------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
---------------------------------------------------------------------------------------------------
Short-Term Bond Index 68 27 0 5 0 100
---------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 52 41 0 6 1 100
---------------------------------------------------------------------------------------------------
|
An explanation of each type of bond follows.
. U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
21
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
. International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In addition, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
22
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of their target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
[FLAG]
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
23
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Funds
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the Fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
. Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
. Add value when these instruments are attractively priced; or
. Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
Vanguard may invest a small portion of each Fund's assets in shares of bond
exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds
listed in the index or in a subset of the index. Vanguard may purchase ETFs when
doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in Vanguard bond ETFs because Fund assets invested in ETF
Shares are excluded when allocating to the Fund its share of the costs of
Vanguard operations.
24
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
25
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent- trading strategies.
Do not invest with Vanguard if you are a market-timer.
Plain Talk About Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
26
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
Plain Talk About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
27
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately
$1 trillion in assets. Vanguard manages the Funds on an at-cost basis, subject
to the supervision and oversight of the trustees and officers of the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University
of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
28
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the Funds
are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); and managed the Intermediate-Term Bond Index Fund since
its inception (co-managed since 2008). Education: B.S., University of Illinois;
M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; has managed the Short-Term Bond Index
Fund since 2005; and has co-managed the Total Bond Market Index Fund since 2008.
Education: B.S., The Pennsylvania State University; M.B.A., The Wharton School
of the University of Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has managed
investment portfolios since 2005; and has co-managed the Intermediate-Term Bond
Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh
University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Fund Distributions
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; capital gains distributions generally occur
annually in December. In addition, the Funds may occasionally be required to
make supplemental distributions at some other time during the year. You can
receive distributions of income or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
29
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. Distributions declared in December--if paid to you by the end of January--are
taxable for federal income tax purposes as if received in December.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes.
. Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
. Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
. A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
. Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
government may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this exemption.
30
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
Invalid addresses. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
Tax consequences. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax advisor for detailed information about
a fund's tax consequences for you.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
31
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the periods shown, and certain information
reflects financial results for a single Fund share. The total returns in each
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report--along with each Fund's financial statements--is included in the
Funds' most recent annual report to shareholders. To receive a free copy of the
latest annual or semiannual report, you may access a report online at
www.vanguard.com, or you may contact Vanguard by telephone or by mail.
32
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's Signal Shares as an
example. The Signal Shares began fiscal year 2007 with a net asset value
(price) of $9.99 per share. During the year, each Signal Share earned $0.51
from investment income (interest) and $0.17 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.51 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $10.16, reflecting earnings of
$0.68 per share and distributions of $0.51 per share. This was an increase of
$0.17 per share (from $9.99 at the beginning of the year to $10.16 at the end
of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 7.02% for the year.
As of December 31, 2007, the Signal Shares had approximately $5.4 billion in
net assets. For the year, the expense ratio was 0.10% ($1.00 per $1,000 of
net assets), and the net investment income amounted to 5.11% of average net
assets. The Fund sold and replaced securities valued at 54% of its net
assets.
33
Total Bond Market Index Fund Signal Shares
Year Sept. 1,
Ended 2006/1/ to
Dec. 31, Dec. 31,
2007 2006
---------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.99 $9.94
---------------------------------------------------------------------------------------------------
Investment Operations
---------------------------------------------------------------------------------------------------
Net Investment Income .510 .166
---------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .170 .050
---------------------------------------------------------------------------------------------------
Total from Investment Operations .680 .216
---------------------------------------------------------------------------------------------------
Distributions
---------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.510) (.166)
---------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- --
---------------------------------------------------------------------------------------------------
Total Distributions (.510) (.166)
---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.16 $9.99
===================================================================================================
Total Return 7.02% 2.18%
===================================================================================================
Ratios/Supplemental Data
---------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $5,414 $632
---------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.10% 0.11%(2)
---------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.11% 4.97%(2)
---------------------------------------------------------------------------------------------------
Turnover Rate(3) 54% 63%
===================================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
34
Short-Term Bond Index Fund Signal Shares
March 30, 2007/1/ to
December 31, 2007
------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.93
------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------
Net Investment Income .352
------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .200
------------------------------------------------------------------------------------
Total from Investment Operations .552
------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------
Dividends from Net Investment Income (.352)
------------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
------------------------------------------------------------------------------------
Total Distributions (.352)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.13
====================================================================================
Total Return 5.67%
====================================================================================
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,851
------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.10%(2)
------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.66%(2)
------------------------------------------------------------------------------------
Turnover Rate(3) 79%
====================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result of
in-kind purchases or redemptions of the Fund's capital shares, including ETF
Creation Units.
|
35
Intermediate-Term Bond Index Fund Signal Shares
June 4, 2007/1/ to
December 31, 2007
------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.12
------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------
Net Investment Income .297
------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .380
------------------------------------------------------------------------------------
Total from Investment Operations .677
------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------
Dividends from Net Investment Income (.297)
------------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
------------------------------------------------------------------------------------
Total Distributions (.297)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50
====================================================================================
Total Return 6.77%
====================================================================================
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,443
------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.10%(2)
------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.82%(2)
------------------------------------------------------------------------------------
Turnover Rate(3) 72%
====================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result of
in-kind purchases or redemptions of the Fund's capital shares, including ETF
Creation Units.
|
36
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
Each fund you hold in an account is a separate "fund account." For example, if
you hold three funds in a nonretirement account titled in your own name, two
funds in a nonretirement account titled jointly with your spouse, and one fund
in an individual retirement account, you have six fund accounts--and this is
true even if you hold the same fund in multiple accounts.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Signal Shares
To open and maintain an account. $1 million for new investors. Investment
minimums may differ for certain categories of investors. Institutional clients
should contact Vanguard for information on special rules that may apply to them.
. Institutional clients whose accounts are not recordkept by Vanguard.
Institutional clients (including but not limited to financial intermediaries,
defined benefit and contribution plan clients; endowments; and foundations)
whose accounts are not recordkept by Vanguard generally may hold Signal Shares
if the total amount aggregated among all accounts held by the client and
invested in a single Signal Shares fund is at least $1 million.
. Institutional intermediary clients. Institutional clients that are financial
intermediaries generally may hold Signal Shares only if the total amount
invested across all accounts held by the intermediary in the Fund is at least $5
million. Signal Shares generally are not available to financial intermediaries
that serve as retail fund supermarkets.
. Institutional clients whose accounts are recordkept by Vanguard. Institutional
clients whose accounts are recordkept by Vanguard may hold Signal Shares if the
client has more than $15 million in the Fund and transacts with the Fund in a
cost-effective manner. Total assets held by the client at Vanguard and average
participant account balances must also meet or exceed certain eligibility
minimums for Signal Shares. Please contact your Vanguard representative to
determine whether your accounts qualify.
37
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
How to Initiate a Purchase Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your purchase request.
Online. You may open certain types of accounts, request an electronic bank
transfer, and make an exchange (using the proceeds from the redemption of shares
from one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund) through our website at www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to begin the account registration process
or request that the account-opening forms be sent to you. You may also request a
purchase of shares by wire, by electronic bank transfer, or by an exchange. See
Contacting Vanguard.
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. For a list of Vanguard
addresses, see Contacting Vanguard.
Transaction Fee on Purchases
The Funds reserve the right to charge a transaction fee to investors whose
aggregate share purchases equal or exceed the following amounts:
. Total Bond Market Index Fund--$500 million
. Short-Term Bond Index Fund--$100 million
. Intermediate-Term Bond Index Fund--$100 million
How to Pay For a Purchase
By electronic bank transfer. You may purchase shares of a Vanguard fund through
an electronic transfer of money held in a designated bank account. To establish
the electronic bank transfer option on an account, you must designate a bank
account online, complete a special form, or fill out the appropriate section of
your account registration form. After the option is set up on your account, you
can purchase shares by electronic bank transfer on a regular schedule (Automatic
Investment Plan) or whenever you wish. Your purchase request can be initiated
online, by telephone, or by mail.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. See
Contacting Vanguard.
38
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Initiate a Purchase Request: By mail. Make your
check payable to Vanguard and include the appropriate fund number (e.g.,
Vanguard--xx). For a list of Fund numbers (for Funds in this prospectus), see
Contacting Vanguard.
By exchange. You may purchase shares of a Vanguard fund using the proceeds from
the simultaneous redemption of shares from another Vanguard fund. You may
initiate an exchange online (if you are a registered user of Vanguard.com), by
telephone, or by mail. See Exchanging Shares.
Trade Date
The trade date for any purchase request received in good order will depend on
the day and time Vanguard receives your request, the manner in which you are
paying, and the type of fund you are purchasing. Your purchase will be executed
using the NAV as calculated on the trade date. NAVs are calculated only
on days the New York Stock Exchange (NYSE) is open for trading (a business day).
For purchases by check into all funds other than money market funds, and for
purchases by exchanges or wire into all funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the purchase request is received on a business day after the close of regular
trading on the NYSE, or on a nonbusiness day, the trade date will be the next
business day.
For purchases by check into money market funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the next
business day. If the purchase request is received on a business day after the
close of regular trading on the NYSE, or on a nonbusiness day, the trade date
will be the second business day following the day Vanguard receives the purchase
request. Because money market instruments must be purchased with federal funds
and it takes a money market mutual fund one business day to convert check
proceeds into federal funds, the trade date will be one business day later than
for other funds.
For purchases by electronic bank transfer using an Automatic Investment Plan:
Your trade date generally will be one business day before the date you
designated for withdrawal from your bank account.
For purchases by electronic bank transfer not using an Automatic Investment
Plan: If the purchase request is received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the next business day. If the
purchase request is received on a business day after 10 p.m., Eastern time, or
on a nonbusiness day, the trade date will be the second business day following
the day Vanguard receives the request.
39
If your purchase request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Earning Dividends
You begin earning dividends on the business day following your trade date. When
buying money market fund shares through a federal funds wire, however, you can
begin earning dividends immediately by making a purchase request by telephone to
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund).
Other Purchase Rules You Should Know
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Vanguard will not accept your request to cancel any purchase
request once processing has begun. Please be careful when placing a purchase
request.
CONVERTING SHARES
When a conversion occurs, you receive shares of one class in place of shares of
another class of the same fund. At the time of conversion, the dollar value of
the "new" shares you receive equals the dollar value of the "old" shares that
were converted. In other words, the conversion has no effect on the value of
your
40
investment in the fund. However, the number of shares you own after the
conversion may be greater than or less than the number of shares you owned
before the conversion, depending on the net asset values of the two share
classes.
A conversion between share classes of the same fund is a nontaxable event.
Trade Date
The trade date for any conversion request received in good order will depend on
the day and time Vanguard receives your request. Your conversion will be
executed using the NAV of the different share classes on the trade date. NAVs
are calculated only on days the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close
of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day. For a conversion request received on a business day after
the close of regular trading on the NYSE, or on a nonbusiness day, the trade
date will be the next business day. See Other Rules You Should Know.
Conversions From Investor Shares to Signal Shares
You may convert Investor Shares to Signal Shares at any time if you meet the
eligibility requirements for Signal Shares. Vanguard will not automatically
convert accounts holding Investor Shares that qualify for conversion to Signal
Shares. You may contact Vanguard by telephone or by mail to request this
transaction.
Conversions From Admiral Shares to Signal Shares
Vanguard may convert an eligible investor's Admiral Shares to Signal Shares.
Vanguard will notify the investor in writing before any automatic conversion to
Signal Shares. You may instruct Vanguard if you do not wish to convert to Signal
Shares. In such cases, your Admiral Shares will be converted to Investor Shares.
Conversions to Institutional Shares
You are eligible for a self-directed conversion from another share class to
Institutional Shares of the same Fund (if available), provided that your account
meets all Institutional Shares' eligibility requirements. Registered users of
our website, www.vanguard.com, may request a conversion online, or you may
contact Vanguard by telephone or by mail to request this transaction. Accounts
that qualify for Institutional Shares will not be automatically converted.
41
Mandatory Conversions to Investor Shares
If an account no longer meets the balance requirements for Signal Shares,
Vanguard may automatically convert the shares in the account to Investor Shares.
A decline in the account balance because of market movement may result in such a
conversion. Vanguard will notify the investor in writing before any mandatory
conversion occurs.
Redeeming Shares
How to Initiate a Redemption Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your redemption request.
Online. You may redeem shares, request an electronic bank transfer, and make an
exchange (the purchase of shares of one Vanguard fund using the proceeds of a
simultaneous redemption from another Vanguard fund) through our website at
www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. See Contacting Vanguard.
By writing a check. If you've established the checkwriting service on your
account, you can redeem shares by writing a check for $250 or more.
How to Receive Redemption Proceeds
By electronic bank transfer. You may have the proceeds of a fund redemption
sent directly to a designated bank account. To establish the electronic bank
transfer option, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can redeem shares by electronic
bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or
whenever you wish ($100 minimum). Your transaction can be initiated online, by
telephone, or by mail.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
42
By exchange. You may have the proceeds of a Vanguard fund redemption invested
directly in shares of another Vanguard fund. You may initiate an exchange online
(if you are a registered user of Vanguard.com), by telephone, or by mail.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
The trade date for any redemption request received in good order will depend on
the day and time Vanguard receives your request and the manner in which you are
redeeming. Your redemption will be executed using the NAV as calculated
on the trade date. NAVs are calculated only on days that the NYSE is open for
trading (a business day).
For redemptions by check, exchange, or wire: If the redemption request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the redemption request is received on a business day after the close of
regular trading on the NYSE, or on a nonbusiness day, the trade date will be the
next business day.
. Note on timing of wire redemptions from money market funds: For telephone
requests received by Vanguard on a business day before 10:45 a.m., Eastern
time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the
redemption proceeds will leave Vanguard by the close of business the same day.
For telephone requests received by Vanguard on a business day after those
cut-off times, or on a nonbusiness day, and for all requests other than by
telephone, the redemption proceeds will leave Vanguard by the close of
business on the next business day.
. Note on timing of wire redemptions from bond funds: For requests received by
Vanguard on a business day before the close of regular trading on the NYSE
(generally 4 p.m., Eastern time), the redemption proceeds will leave Vanguard
by the close of business on the next business day. For requests received by
Vanguard on a business day after the close of regular trading on the NYSE, or
on a nonbusiness day, the redemption proceeds will leave Vanguard by the close
of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an Automatic Withdrawal Plan:
Your trade date generally will be the date you designated for withdrawal of
funds (redemption of shares) from your Vanguard account. Proceeds of redeemed
shares generally will be credited to your designated bank account two business
days after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
43
For redemptions by electronic bank transfer not using an Automatic Withdrawal
Plan: If the redemption request is received by Vanguard on a business day before
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the
trade date generally will be the same day. If the redemption request is received
on a business day after the close of regular trading on the NYSE, or on a
nonbusiness day, the trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Earning Dividends
Shares continue earning dividends through your trade date. There are two
exceptions to this rule: (1) If you redeem shares by writing a check against
your account, the shares will stop earning dividends on the day that your check
posts to your account; and (2) For money market funds only, if you redeem shares
with a same-day wire request before 10:45 a.m., Eastern time (2 p.m., Eastern
time for Vanguard Prime Money Market Fund), the shares will stop earning
dividends that same day.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, or
retirement accounts. Please call us before attempting to redeem from these types
of accounts.
Potentially disruptive redemptions. Vanguard reserves the right to pay all or
part of a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in market-timing
or frequent trading. Under these circumstances, Vanguard also reserves the right
to delay payment of the redemption proceeds for up to seven calendar days. By
calling us before you attempt to redeem a large dollar amount, you may avoid
in-kind or delayed payment of your redemption. Please see Frequent-Trading
Limits for information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may not be made available to you until the fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
44
Share certificates. If you hold shares in certificates, those shares cannot be
redeemed, exchanged, or converted until you return the certificates (unsigned)
to Vanguard by registered mail. For the correct address, see Contacting
Vanguard.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, we can make your
redemption check payable, or wire your redemption proceeds, to a different
person or send it to a different address. However, this requires the written
consent of all registered account owners and may require a signature guarantee.
You can obtain a signature guarantee from most commercial and savings banks,
credit unions, trust companies, or member firms of a U.S. stock exchange. A
notary public cannot provide a signature guarantee.
No cancellations. Vanguard will not accept your request to cancel any
redemption request once processing has begun. Please be careful when placing a
redemption request.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
An exchange occurs when you use the proceeds from the redemption of shares of
one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund. You can make exchange requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming
Shares.
If the NYSE is open for regular trading (a business day) at the time an exchange
request is received in good order, the trade date will generally be the same
day.
See Other Rules You Should Know--Good Order for additional information on all
transaction requests.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
45
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
46
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
. Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard
will systematically monitor for frequent trading in institutional clients'
accounts. If we detect suspicious trading activity, we will investigate and take
appropriate action, which may include applying to a client's accounts the 60-day
policy previously described, prohibiting a client's purchases of fund shares,
and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
47
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under
"Account Profile." You can revoke your electronic consent at any time, and we
will begin to send paper copies of these documents within 30 days of receiving
your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
Proof of a caller's authority. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Subject to revision. For any or all shareholders, we reserve the right, at any
time
and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
48
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for
good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private, and immediately review any account
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
Unusual Circumstances
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
49
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Low-Balance Accounts
Each Fund reserves the right to convert an investor's Signal Shares to Investor
Shares of the Fund if the investor's fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. Any
such conversion will be preceded by written notice to the investor.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon initial notification to Vanguard of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
50
FUND AND ACCOUNT UPDATES
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you in
preparing your income tax returns. These statements, which are generally mailed
in January, will report the previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs and
other retirement plans. These statements can be viewed online.
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
51
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard Bond Index Funds twice a year, in February and August. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
52
CONTACTING VANGUARD
Web
-----------------------------------------------------------------------------------------------------
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
-----------------------------------------------------------------------------------------------------
Phone
-----------------------------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R) For exchange transactions (subject to limitations)
/800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
-----------------------------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
-----------------------------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
-----------------------------------------------------------------------------------------------------
Signal Service Centers For information regarding Signal Shares
For institutional intermediary clients: 800-997-2798
For institutional clients whose accounts are not
recordkept at Vanguard: 888-809-8102
For institutional clients whose accounts are recordkept at
Vanguard: 800-523-1188
For most Signal Share transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
-----------------------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only:
Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time
-----------------------------------------------------------------------------------------------------
Intermediary Sales For information and services for financial intermediaries
Support including broker-dealers, trust institutions, insurance
800-997-2798 companies, and financial advisors Business hours only: Monday-Friday,
8:30 a.m. to 7p.m., Eastern time
-----------------------------------------------------------------------------------------------------
|
53
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
----------------------------------------------------------------------
Regular Mail (Institutions) The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
|
Fund Numbers
Please use the specific fund number when contacting us:
Signal Shares
------------------------------------------------------------
Vanguard Total Bond Market Index Fund 1351
------------------------------------------------------------
Vanguard Short-Term Bond Index Fund 1349
------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund 1350
------------------------------------------------------------
|
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal,
Vanguard Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business
Online, and the ship logo are trademarks of The Vanguard Group, Inc. CFA/(R)/ is
a trademark owned by CFA Institute. All other marks are the exclusive property
of their respective owners.
54
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
55
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
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[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond Index Funds, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and
Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Funds are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P1351 042008
Vanguard/(R)/ Bond Index Funds
> Prospectus
Signal(TM) Shares for Participants
April 25, 2008
[VANGUARD SHIP LOGO/R/]
Vanguard Total Bond Market Index Fund
Vanguard Short-Term Bond Index Fund
Vanguard Intermediate-Term Bond Index Fund
This prospectus contains financial data for the Funds through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
-------------------------------------------------------------------------------------------
Vanguard Fund Profiles 1 More on the Funds 14
-------------------------------------------------------------------------------------------
Total Bond Market Index Fund 1 The Funds and Vanguard 24
-------------------------------------------------------------------------------------------
Short-Term Bond Index Fund 5 Investment Advisor 25
-------------------------------------------------------------------------------------------
Intermediate-Term Bond Index Fund 9 Dividends, Capital Gains, and Taxes 26
-------------------------------------------------------------------------------------------
Investing in Index Funds 13 Share Price 27
-------------------------------------------------------------------------------------------
Financial Highlights 28
-------------------------------------------------------------------------------------------
Investing With Vanguard 32
-------------------------------------------------------------------------------------------
Accessing Fund Information by Computer 35
-------------------------------------------------------------------------------------------
Glossary of Investment Terms 36
-------------------------------------------------------------------------------------------
|
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Funds' Signal Shares and is intended for participants
in employer-sponsored retirement or savings plans. Another version--for
investors who would like to open a personal investment account--can be obtained
by calling Vanguard at 800-662-7447.
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency.
FUND PROFILE--VANGUARD TOTAL BOND MARKET INDEX FUND
Investment Objective
The Fund seeks to track the performance of a broad, market-weighted bond index.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers U.S. Aggregate Bond
Index. This Index represents a wide spectrum of public, investment-grade,
taxable, fixed income securities in the United States--including government,
corporate, and international dollar-denominated bonds, as well as
mortgage-backed and asset-backed securities--all with maturities of more than 1
year.
The Fund invests by sampling the Index, meaning that it holds a broadly
diversified collection of securities that, in the aggregate, approximates the
full Index in terms of key risk factors and other characteristics. All of the
Fund's investments will be selected through the sampling process, and at least
80% of the Fund's assets will be invested in bonds held in the Index. The Fund
maintains a dollar-weighted average maturity consistent with that of the Index,
which generally ranges between 5 and 10 years and, as of December 31, 2007, was
7.0 years. For additional information on the Fund's investment strategies,
please see More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in short- and intermediate-term bonds, whose
prices are less sensitive to interest rate changes than are the prices of
long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
1
. Call risk, which is the chance that during periods of falling interest rates,
issuers of callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose potential
price appreciation and would be forced to reinvest the unanticipated proceeds at
lower interest rates, resulting in a decline in the Fund's income. For
mortgage-backed securities, this risk is known as prepayment risk.
Call/prepayment risk should be moderate for the Fund because it invests only a
portion of its assets in callable bonds and mortgage-backed securities.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows the performance of the Fund's
Signal Shares in their first full calendar year. The table shows how the average
annual total returns of the Signal Shares compare with those of the Fund's
target index. Keep in mind that the Fund's past performance does not indicate
how the Fund will perform in the future.
Annual Total Returns--Signal Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2007 7.02%
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 3.10% (quarter ended December 31, 2007), and the lowest return for a
quarter was -0.63% (quarter ended June 30, 2007).
2
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year Inception/1/
----------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund Signal Shares 7.02% 6.94%
----------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index
(reflects no deduction for fees or expenses) 6.97% 6.81%
----------------------------------------------------------------------------------------
1 Since-inception returns are from September 1, 2006--the inception date of
the Signal Shares--through December 31, 2007.
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Signal Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
--------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------
Redemption Fee None
--------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------
Management Expenses 0.09%
--------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------
Other Expenses 0.01%
--------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
--------------------------------------------------------------------------
1 A portfolio transaction fee of 0.18% may apply to aggregate purchases of more
than $500 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Signal Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
3
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $55.8 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--December 11, 1986
Signal Shares--September 1, 2006
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation TotBdSgl
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 1351
-----------------------------------------------------------------------------------------------
CUSIP Number 921937868
-----------------------------------------------------------------------------------------------
Ticker Symbol VBTSX
-----------------------------------------------------------------------------------------------
|
4
FUND PROFILE--VANGUARD SHORT-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 1-5 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 1 and 5 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally does not exceed 3 years and, as of December 31, 2007, was 2.7 years.
For additional information on the Fund's investment strategies, please see More
on the Funds.
Primary Risks
The Fund is designed for investors with a low tolerance for risk, but you could
still lose money by investing in it. The Fund's performance could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be low for the Fund
because it invests mainly in short-term bonds, whose prices are much less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally high for short-term bond
funds, so investors should expect the Fund's monthly income to fluctuate.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
5
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's Signal Shares, the information presented in the bar
chart and table reflects the performance of the Admiral Shares of Vanguard
Short-Term Bond Index. (Admiral Shares are offered through a separate
prospectus.) Performance based on net asset value for the Signal Shares would be
substantially similar, because the expense ratio of the Signal Shares is the
same as that of the Admiral Shares and because both share classes constitute an
investment in the same portfolio of securities. Therefore, the returns of the
Signal Shares should closely match those of the Admiral Shares. The bar chart
shows how the performance of the Fund's Admiral Shares has varied from one
calendar year to another over the periods shown. The table shows how the average
annual total returns of the Fund's Admiral Shares compare with those of the
Fund's target index. Keep in mind that the Fund's past performance does not
indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 6.15%
2003 3.43
2004 1.77
2005 1.38
2006 4.16
2007 7.31
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 2.80% (quarter ended September 30, 2002), and the lowest return for
a quarter was -1.78% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
--------------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund Admiral Shares 7.31% 3.59% 3.74%
--------------------------------------------------------------------------------------------
Lehman Brothers 1-5 Year U.S. Government/Credit Index
(reflects no deduction for fees or expenses) 7.27% 3.60% 4.07%
--------------------------------------------------------------------------------------------
1 Since-inception returns are from November 12, 2001--the inception date of the
Admiral Shares--through December 31, 2007.
|
6
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Signal Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Transaction Fee on Purchases None/1/
--------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Redemption Fee None
--------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
--------------------------------------------------------------------------------
Management Expenses 0.09%
--------------------------------------------------------------------------------
12b-1 Distribution Fee None
--------------------------------------------------------------------------------
Other Expenses 0.01%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
--------------------------------------------------------------------------------
1 A portfolio transaction fee of 0.15% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Signal Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
7
Additional Information
As of December 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes) $6.5 billion
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc. Valley Forge, Pa., since inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Signal Shares--March 30, 2007
----------------------------------------------------------------------------------------------
Newspaper Abbreviation STBondSgl
----------------------------------------------------------------------------------------------
Vanguard Fund Number 1349
----------------------------------------------------------------------------------------------
CUSIP Number 921937850
----------------------------------------------------------------------------------------------
Ticker Symbol VBSSX
----------------------------------------------------------------------------------------------
|
8
FUND PROFILE--VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
Investment Objective
The Fund seeks to track the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Lehman Brothers 5-10 Year U.S.
Government/ Credit Index. This Index includes all medium and larger issues of
U.S. government, investment-grade corporate, and investment-grade international
dollar-denominated bonds that have maturities between 5 and 10 years and are
publicly issued.
The Fund invests by sampling the Index, meaning that it holds a range of
securities that, in the aggregate, approximates the full Index in terms of key
risk factors and other characteristics. All of the Fund's investments will be
selected through the sampling process, and at least 80% of the Fund's assets
will be invested in bonds held in the Index. The Fund maintains a
dollar-weighted average maturity consistent with that of the Index, which
generally ranges between 5 and 10 years and, as of December 31, 2007, was 7.5
years. For additional information on the Fund's investment strategies, please
see More on the Funds.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
. Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk should be moderate for the
Fund because it invests mainly in intermediate-term bonds, whose prices are less
sensitive to interest rate changes than are the prices of long-term bonds.
. Income risk, which is the chance that the Fund's income will decline because
of falling interest rates. Income risk is generally moderate for
intermediate-term bond funds, so investors should expect the Fund's monthly
income to fluctuate accordingly.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, or that negative perceptions of the issuer's
ability to make such payments will cause the price of that bond to decline.
Credit risk should be low for the Fund because it purchases only bonds that are
issued by the U.S. Treasury or are of investment-grade quality.
. Index sampling risk, which is the chance that the securities selected for the
Fund, in the aggregate, will not provide investment performance matching that of
the Index. Index sampling risk for the Fund should be low.
9
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's Signal Shares the information presented in the bar
chart and table reflects the performance of the Admiral Shares of Vanguard
Intermediate-Term Bond Index. (Admiral Shares are offered through a separate
prospectus.) Performance based on net asset value for the Signal Shares would be
substantially similar, because the expense ratio of the Signal Shares is the
same as that of the Admiral Shares and because both share classes constitute an
investment in the same portfolio of securities. Therefore, the returns of the
Signal Shares should closely match those of the Admiral Shares. The bar chart
shows how the performance of the Fund's Admiral Shares has varied from one
calendar year to another over the periods shown. The table shows how the average
annual total returns of the Fund's Admiral Shares compare with those of the
Fund's target index. Keep in mind that the Fund's past performance does not
indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares
------------------------------------------------------------
[Bar Chart Range: 40% to -20%]
2002 10.91%
2003 5.70
2004 5.30
2005 1.82
2006 3.98
2007 7.70
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 5.78% (quarter ended September 30, 2002), and the lowest return for
a quarter was -3.86% (quarter ended June 30, 2004).
Average Annual Total Returns for Periods Ended December 31, 2007
Since
1 Year 5 Years Inception/1/
---------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund Admiral Shares 7.70% 4.88% 5.26%
---------------------------------------------------------------------------------------------
Lehman Brothers 5-10 Year U.S. Government/Credit Index
(reflects no deduction for fees or expenses) 7.55% 4.87% 5.54%
---------------------------------------------------------------------------------------------
1 Since-inception returns are from November 12, 2001--the inception date of the
Admiral Shares--through December 31, 2007.
|
10
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Signal Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-----------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-----------------------------------------------------------------
Transaction Fee on Purchases None/1/
-----------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-----------------------------------------------------------------
Redemption Fee None
-----------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-----------------------------------------------------------------
Management Expenses 0.10%
-----------------------------------------------------------------
12b-1 Distribution Fee None
-----------------------------------------------------------------
Other Expenses 0.00%
-----------------------------------------------------------------
Total Annual Fund Operating Expenses 0.10%
-----------------------------------------------------------------
1 A portfolio transaction fee of 0.23% may apply to aggregate purchases of more
than $100 million by a single investor.
|
The following example is intended to help you compare the cost of investing in
the Fund's Signal Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$10 $32 $56 $128
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
11
Additional Information
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.2 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--March 1, 1994
Signal Shares--June 4, 2007
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation ITBondSgl
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 1350
-----------------------------------------------------------------------------------------------
CUSIP Number 921937843
-----------------------------------------------------------------------------------------------
Ticker Symbol VIBSX
-----------------------------------------------------------------------------------------------
|
12
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." An index is an unmanaged group of securities whose
overall performance is used as a standard to measure the investment performance
of a particular market. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror the performance of the target
index, for better or worse. However, an index fund does not always perform
exactly like its target index. For example, like all mutual funds, index funds
have operating expenses and transaction costs. Market indexes do not, and
therefore will usually have a slight performance advantage over funds that track
them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus dealer markups and other transaction costs--to a minimum.
13
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Each Fund's policy
of investing at least 80% of its assets in bonds that are part of the target
index may be changed only upon 60 days' notice to shareholders.
Market Exposure
[FLAG]
Each Fund is subject to interest rate risk, which is the chance that bond
prices overall will decline because of rising interest rates. Interest rate
risk should be low for short-term bond funds, moderate for intermediate-term
bond funds, and high for long-term bond funds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly because of rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on the values of three noncallable bonds of different maturities,
each with a face value of $1,000.
How Interest Rate Changes Affect the Value of a $1,000 Bond/1/
After a 1% After a 1% After a 2% After a 2%
Type of Bond (Maturity) Increase Decrease Increase Decrease
------------------------------------------------------------------------------
Short-Term (2.5 years) $977 $1,024 $955 $1,048
------------------------------------------------------------------------------
Intermediate-Term (10 years) 926 1,082 858 1,172
------------------------------------------------------------------------------
Long-Term (20 years) 884 1,137 786 1,299
------------------------------------------------------------------------------
1 Assuming a 5% coupon.
|
14
These figures are for illustration only; you should not regard them as an
indication of future performance of the bond market as a whole or the Funds in
particular.
Plain Talk About Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
of comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond
for the price you paid--you would probably have to lower your asking price.
On the other hand, if interest rates were falling and 4% bonds were being
offered, you should be able to sell your 5% bond for more than you paid.
How mortgage-backed securities are different: In general, declining interest
rates will not lift the prices of mortgage-backed securities--such as
GNMAs--as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
securities for prepayment risk--the possibility that homeowners will
refinance their mortgages at lower rates and cause the bonds to be paid off
prior to maturity. In part to compensate for this prepayment possibility,
mortgage-backed securities tend to offer higher yields than other bonds of
comparable credit quality and maturity.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
Each Fund is subject to income risk, which is the chance that the Fund's income
will decline because of falling interest rates. A fund's income declines when
interest rates fall because the fund then must invest in lower-yielding bonds.
Income risk is generally higher for short-term bond funds and lower for
long-term bond funds.
Plain Talk About Bond Maturities
A bond is issued with a specific maturity date--the date when the issuer must
pay back the bond's principal (face value). Bond maturities range from less
than 1 year to more than 30 years. Typically, the longer a bond's maturity,
the more price risk you, as a bond investor, face as interest rates rise--but
also the higher yield you could receive. Longer-term bonds are more suitable
for investors willing to take a greater risk of price fluctuations to get
higher and more stable interest income. Shorter-term bond investors should be
willing to accept lower yields and greater income variability in return for
less fluctuation in the value of their investment.
15
Although falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[FLAG]
The Total Bond Market Index Fund is subject to call risk, which is the chance
that during periods of falling interest rates, issuers of callable bonds may
call (repay) securities with higher coupons or interest rates before their
maturity dates. The Fund would then lose potential price appreciation and would
be forced to reinvest the unanticipated proceeds at lower interest rates,
resulting in a decline in the Fund's income. For mortgage-backed securities,
this risk is known as prepayment risk.
Because the Total Bond Market Index Fund invests only a portion of its assets in
callable bonds and mortgage-backed securities, call/prepayment risk for the Fund
should be moderate.
[FLAG]
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to pay interest and principal in a timely manner, or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that bond to decline.
Plain Talk About Credit Quality
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the dollar-weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, Inc., as of December 31, 2007.
16
Average Credit Quality
Fund Fund's Holdings Target Index
---------------------------------------------------------------
Total Bond Market Index Aa1 Aa1
--------------------------------------------------------------
Short-Term Bond Index Aa1 Aa1
--------------------------------------------------------------
Intermediate-Term Bond Index Aa2 Aa2
--------------------------------------------------------------
|
[FLAG]
Each Fund is subject to index sampling risk, which is the chance that the
securities selected for a Fund, in the aggregate, will not provide investment
performance matching that of its Index. Index sampling risk for each Fund
should be low.
To a limited extent, the Funds are also exposed to event risk, which is the
chance that corporate fixed income securities held by a Fund may suffer a
substantial decline in credit quality and market value because of a corporate
restructuring or another corporate event.
The Funds are generally managed without regard to tax ramifications.
The following summary table is provided to help you distinguish among the Funds
and their various risks.
Risks of the Funds
Interest Call/ Index
Income Rate Prepayment Credit Sampling
Fund Risk Risk Risk Risk Risk
-------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low Low
-------------------------------------------------------------------------------
Short-Term Bond Index High Low Low Low Low
-------------------------------------------------------------------------------
Intermediate-Term Bond Moderate Moderate Low Low Low
Index
-------------------------------------------------------------------------------
|
Security Selection
Index sampling strategy. Because it would be very expensive and inefficient to
buy and sell all securities held in their target indexes--which is an indexing
strategy called "replication"-- each Fund uses index "sampling" techniques to
select securities. Using sophisticated computer programs, each Fund selects a
representative sample of securities that approximates the full target index in
terms of key risk factors and other characteristics. These factors include
duration, cash flow, quality, and callability of the underlying bonds. In
addition, each Fund keeps industry sector and subsector exposure within tight
boundaries compared to that of its target index. Because the Funds do not hold
all issues in their target indexes, some of the issues (and issuers) that are
held will likely be overweighted (or underweighted) compared with the target
indexes. The
17
maximum overweight (or underweight) is constrained at the issuer level with the
goal of producing well-diversified credit exposure in the portfolio.
The following table shows the number of bonds held by each Fund, as well as the
number of bonds in each Fund's target index, as of December 31, 2007.
Number of Number of Bonds in
Fund Bonds Held Target Index
-------------------------------------------------------------------
Total Bond Market Index 3,157 9,193
-------------------------------------------------------------------
Short-Term Bond Index 816 1,821
-------------------------------------------------------------------
Intermediate-Term Bond Index 920 1,424
-------------------------------------------------------------------
|
Types of bonds. The Total Bond Index Fund tracks the Lehman Brothers U.S.
Aggregate Bond Index; the Short- and Intermediate-Term Bond Funds track subsets
of that Index. Lehman Brothers U.S. Aggregate Bond Index measures the total
universe of taxable investment-grade fixed income securities in the United
States--including government, corporate, and international dollar-denominated
bonds, as well as mortgage-backed and asset-backed securities--all with
maturities of more than 1 year.
As of December 31, 2007, each Fund was composed of the following types of bonds:
International
U.S. Mortgage- Dollar- Short-Term
Fund Government Corporate Backed Denominated Reserves Total
---------------------------------------------------------------------------------------------------
Total Bond Market Index 34% 25% 38% 2% 1% 100%
---------------------------------------------------------------------------------------------------
Short-Term Bond Index 68 27 0 5 0 100
---------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 52 41 0 6 1 100
---------------------------------------------------------------------------------------------------
|
An explanation of each type of bond follows.
. U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
18
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a new
market, or to buy another company. As with other types of bonds, the issuer
promises to repay the principal on a specific date and to make interest payments
in the meantime. The amount of interest offered depends both on market
conditions and on the financial health of the corporation issuing the bonds; a
company whose credit rating is not strong will have to offer a higher interest
rate to obtain buyers for its bonds. For purposes of the preceding table,
corporate bonds include securities that are backed by a pool of underlying
assets (asset-backed securities) or commercial mortgages (commercial
mortgage-backed bonds). Each Fund expects to purchase only investment-grade
corporate bonds.
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of interest
at regular intervals and then repay principal upon maturity, mortgage-backed
securities pass through both interest and principal from underlying mortgages as
part of their regular payments. Because the mortgages underlying the securities
can be prepaid at any time by homeowners or by corporate borrowers,
mortgage-backed securities are subject to prepayment risk. These types of
securities are issued by a number of government agencies, including the GNMA,
the FHLMC, and the FNMA.
The Total Bond Market Index Fund may also invest in conventional mortgage-backed
securities--which are packaged by private corporations and are not guaranteed by
the U.S. government--and enter into mortgage-dollar-roll transactions. In a
mortgage-dollar-roll transaction, the Fund sells mortgage-backed securities to a
dealer and simultaneously agrees to purchase similar securities in the future at
a predetermined price. These transactions simulate an investment in
mortgage-backed securities and have the potential to enhance the Fund's returns
and reduce its administrative burdens, compared with holding mortgage-backed
securities directly. These transactions may increase the Fund's portfolio
turnover rate. Mortgage dollar rolls will be used only to the extent that they
are consistent with the Fund's investment objective and risk profile.
. International dollar-denominated bonds are bonds denominated in U.S. dollars
and issued by foreign governments and companies. To the extent that a Fund owns
foreign bonds, it is subject to country risk, which is the chance that world
events--such as political upheaval, financial troubles, or natural
disasters--will adversely affect the value of securities issued by companies in
foreign countries. In additional, the prices of foreign stocks and the prices of
U.S. stocks have, at times, moved in opposite directions. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
19
Plain Talk About U.S. Government-Sponsored Entities
A variety of U.S. government-sponsored entities (GSEs), such as the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Home Loan Banks (FHLBs), issue debt and
mortgage-backed securities. Although GSEs may be chartered or sponsored by
acts of Congress, they are not funded by congressional appropriations.
Generally, their securities are neither issued by nor guaranteed by the U.S.
Treasury and are not backed by the full faith and credit of the U.S.
government. In most cases, these securities are supported only by the credit
of the GSE, standing alone. In some cases, a GSE's securities may be
supported by the ability of the GSE to borrow from the Treasury, or may be
supported by the U.S. government in some other way. Securities issued by the
Government National Mortgage Association (GNMA), however, are backed by the
full faith and credit of the U.S. government.
Other Investment Policies and Risks
Each Fund will invest at least 80% of its assets in bonds held in its target
index. Up to 20% of each Fund's assets may be used to purchase nonpublic,
investment-grade securities, generally referred to as 144A securities, as well
as smaller public issues or medium-term notes not included in the index because
of the small size of the issue. The vast majority of these securities will have
characteristics and risks similar to those in the target indexes. Subject to the
same 20% limit, the Funds may also purchase other investments that are outside
of their target indexes or may hold bonds that, when acquired, were included in
the index but subsequently were removed. The Funds may also invest in relatively
conservative classes of collateralized mortgage obligations (CMOs), which offer
a high degree of cash-flow predictability and a low level of vulnerability to
mortgage prepayment risk. To reduce credit risk, these less-risky classes of
CMOs are purchased only if they are issued by agencies of the U.S. government or
issued by private companies that carry high-quality investment-grade ratings.
[FLAG]
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
20
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Funds
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the Fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
. Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
. Add value when these instruments are attractively priced; or
. Adjust sensitivity to changes in interest rates.
The Funds' derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
Vanguard may invest a small portion of each Fund's assets in shares of bond
exchange-traded funds (ETFs). ETFs provide returns similar to those of the bonds
listed in the index or in a subset of the index. Vanguard may purchase ETFs when
doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in Vanguard bond ETFs because Fund assets invested in ETF
Shares are excluded when allocating to the Fund its share of the costs of
Vanguard operations.
21
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
22
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent- trading strategies.
Do not invest with Vanguard if you are a market-timer.
Plain Talk About Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Funds. A
turnover rate of 100%, for example, would mean that a Fund had sold and replaced
securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for bond funds was approximately 111%; for indexed bond funds, the average
turnover rate was approximately 82%, both as reported by Morningstar, Inc., on
December 31, 2007.
23
Plain Talk About Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
Plain Talk About Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
24
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its Fixed
Income Group. As of December 31, 2007, Vanguard served as advisor for
approximately
$1 trillion in assets. Vanguard manages the Funds on an at-cost basis, subject
to the supervision and oversight of the trustees and officers of the Funds.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended June 30.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University
of Chicago.
Robert F. Auwaerter is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
25
Plain Talk About the Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the Funds
are:
Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; managed the Total Bond Market Index Fund since 1992
(co-managed since 2008); and managed the Intermediate-Term Bond Index Fund since
its inception (co-managed since 2008). Education: B.S., University of Illinois;
M.B.A., University of Chicago.
Gregory Davis, CFA, Principal of Vanguard and head of Vanguard's Bond Index
Group. He has worked in investment management for Vanguard since 1999; has
managed investment portfolios since 2000; has managed the Short-Term Bond Index
Fund since 2005; and has co-managed the Total Bond Market Index Fund since 2008.
Education: B.S., The Pennsylvania State University; M.B.A., The Wharton School
of the University of Pennsylvania.
Joshua C. Barrickman, CFA, Portfolio Manager for Vanguard. He has been with
Vanguard since 1998; has worked in investment management since 1999; has managed
investment portfolios since 2005; and has co-managed the Intermediate-Term Bond
Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh
University.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; capital gains distributions generally occur
annually in December. In addition, the Funds may occasionally be required to
make supplemental distributions at some other time during the year.
Your distributions will be reinvested in additional Fund shares and accumulate
on a tax-deferred basis if you are investing through an employer-sponsored
retirement or savings plan. You will not owe taxes on these distributions until
you begin withdrawals from the plan. You should consult your plan administrator,
your plan's Summary Plan Description, or your tax advisor about the tax
consequences of plan withdrawals.
26
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
27
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Signal Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Signal Share. The total
returns in each table represent the rate that an investor would have earned or
lost each period on an investment in the Signal Shares (assuming reinvestment of
all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund's Signal Shares as an
example. The Signal Shares began fiscal year 2007 with a net asset value
(price) of $9.99 per share. During the year, each Signal Share earned $0.51
from investment income (interest) and $0.17 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.51 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $10.16, reflecting earnings of
$0.68 per share and distributions of $0.51 per share. This was an increase of
$0.17 per share (from $9.99 at the beginning of the year to $10.16 at the end
of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 7.02% for the year.
As of December 31, 2007, the Signal Shares had approximately $5.4 billion in
net assets. For the year, the expense ratio was 0.10% ($1.00 per $1,000 of
net assets), and the net investment income amounted to 5.11% of average net
assets. The Fund sold and replaced securities valued at 54% of its net
assets.
28
Total Bond Market Index Fund Signal Shares
Year Sept. 1,
Ended 2006/1/ to
Dec. 31, Dec. 31,
2007 2006
---------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.99 $9.94
---------------------------------------------------------------------------------------------------
Investment Operations
---------------------------------------------------------------------------------------------------
Net Investment Income .510 .166
---------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .170 .050
---------------------------------------------------------------------------------------------------
Total from Investment Operations .680 .216
---------------------------------------------------------------------------------------------------
Distributions
---------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.510) (.166)
---------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- --
---------------------------------------------------------------------------------------------------
Total Distributions (.510) (.166)
---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.16 $9.99
===================================================================================================
Total Return 7.02% 2.18%
===================================================================================================
Ratios/Supplemental Data
---------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $5,414 $632
---------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.10% 0.11%(2)
---------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.11% 4.97%(2)
---------------------------------------------------------------------------------------------------
Turnover Rate(3) 54% 63%
===================================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result
of in-kind purchases or redemptions of the Fund's capital shares, including
ETF Creation Units.
|
29
Short-Term Bond Index Fund Signal Shares
March 30, 2007/1/ to
December 31, 2007
------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.93
------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------
Net Investment Income .352
------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .200
------------------------------------------------------------------------------------
Total from Investment Operations .552
------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------
Dividends from Net Investment Income (.352)
------------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
------------------------------------------------------------------------------------
Total Distributions (.352)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.13
====================================================================================
Total Return 5.67%
====================================================================================
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,851
------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.10%(2)
------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.66%(2)
------------------------------------------------------------------------------------
Turnover Rate(3) 79%
====================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result of
in-kind purchases or redemptions of the Fund's capital shares, including ETF
Creation Units.
|
30
Intermediate-Term Bond Index Fund Signal Shares
June 4, 2007/1/ to
December 31, 2007
------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.12
------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------
Net Investment Income .297
------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments .380
------------------------------------------------------------------------------------
Total from Investment Operations .677
------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------
Dividends from Net Investment Income (.297)
------------------------------------------------------------------------------------
Distributions from Realized Capital Gains --
------------------------------------------------------------------------------------
Total Distributions (.297)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.50
====================================================================================
Total Return 6.77%
====================================================================================
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,443
------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.10%(2)
------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.82%(2)
------------------------------------------------------------------------------------
Turnover Rate(3) 72%
====================================================================================
1 Inception.
2 Annualized.
3 Excludes the value of portfolio securities received or delivered as a result of
in-kind purchases or redemptions of the Fund's capital shares, including ETF
Creation Units.
|
31
INVESTING WITH VANGUARD
One or more of the Funds are an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.
. If you have any questions about a Fund or Vanguard, including those about a
Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV after Vanguard receives the order from your plan
administrator). As long as this request is received before the close of trading
on the New York Stock Exchange (generally 4 p.m., Eastern time), you will
receive that day's NAV. This is known as your trade date.
You begin earning dividends on the next business day after your contribution
trade date. Shares continue earning dividends until the next business day after
your exchange or redemption trade date.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can disrupt the management
32
of the Vanguard funds and increase their transaction costs, Vanguard places
certain limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
33
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. These postings generally remain
until replaced by new postings as previously described. Please consult the
Fund's Statement of Additional Information or our website for a description of
the policies and procedures that govern disclosure of the Fund's portfolio
holdings.
34
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Admiral, Signal, Vanguard ETF, and
the ship logo are trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark
owned by CFA Institute. All other marks are the exclusive property of their
respective owners.
35
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Bond. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Corporate Bond. An IOU issued by a business that wants to borrow money. As with
other types of bonds, the issuer promises to repay the borrowed money on a
specific date and to make interest payments in the meantime.
Coupon. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Face Value. The amount to be paid at a bond's maturity; also known as the par
value or principal.
Fixed Income Security. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
International Dollar-Denominated Bond. A bond denominated in U.S. dollars
issued by foreign governments and companies. Because the bond's value is
designated in dollars, an investor is not exposed to foreign-currency risk.
36
Investment-Grade Bond. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
Mortgage-Backed Security. A bond or pass-through certificate that represents an
interest in an underlying pool of mortgages and is issued by various government
agencies or private corporations. Unlike ordinary fixed income securities,
mortgage-backed securities include both interest and principal as part of their
regular payments.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
37
[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Bond Index Funds, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Funds' investments is
available in the Funds' annual and semiannual reports to shareholders. In the
annual report, you will find a
discussion of the market conditions and investment
strategies that significantly affected the Funds'
performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and
Exchange Commission (SEC)
You can review and copy information about the Funds
(including the SAI) at the SEC's Public Reference Room
in Washington, DC. To find out more about this public
service, call the SEC at 202-551-8090. Reports and
other information about the Funds are also available
in the EDGAR database on the SEC's Internet site
at www.sec.gov, or you can receive copies of this
information, for a fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and
Exchange Commission, Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I1351 042008
VANGUARD/(R)/ INFLATION-PROTECTED
SECURITIES FUND
> PROSPECTUS
INVESTOR SHARES & ADMIRAL(TM) SHARES
April 25, 2008
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
This prospectus contains financial data for the Fund through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
-------------------------------------------------------------------------------------
Fund Profile 1 Investing With Vanguard 23
-------------------------------------------------------------------------------------
More on the Fund 6 Purchasing Shares 23
-------------------------------------------------------------------------------------
The Fund and Vanguard 14 Converting Shares 26
-------------------------------------------------------------------------------------
Investment Advisor 14 Redeeming Shares 27
-------------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes 15 Exchanging Shares 31
-------------------------------------------------------------------------------------
Share Price 18 Frequent-Trading Limits 31
-------------------------------------------------------------------------------------
Financial Highlights 19 Other Rules You Should Know 33
-------------------------------------------------------------------------------------
Fund and Account Updates 37
-------------------------------------------------------------------------------------
Contacting Vanguard 39
-------------------------------------------------------------------------------------
Glossary of Investment Terms 41
-------------------------------------------------------------------------------------
|
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
SHARE CLASS OVERVIEW
This prospectus offers the Fund's Investor Shares and Admiral Shares. Please
note that Admiral Shares are not available for:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special administrative services from
Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
A separate prospectus offers the Fund's Institutional Shares, which are
generally for investors who do not require special employee benefit plan
services and who invest a minimum of $5 million.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE COMPANY OR ANY OTHER GOVERNMENT
AGENCY.
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide inflation protection and income consistent with
investment in inflation-indexed securities.
PRIMARY INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in inflation-indexed bonds issued by
the U.S. government, its agencies and instrumentalities, and corporations. The
Fund may invest in bonds of any maturity; however, its dollar-weighted average
maturity is expected to be in the range of 7 to 20 years. At a minimum, all
bonds purchased by the Fund will be rated "investment-grade." For additional
information on the Fund's investment strategies, please see MORE ON THE FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Income fluctuations. The Fund's quarterly income distributions are likely to
fluctuate considerably more than the income distributions of a typical bond
fund. Income fluctuations associated with changes in interest rates are expected
to be low; however, income fluctuations associated with changes in inflation are
expected to be high. Overall, investors can expect income fluctuations to be
high for the Fund.
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk is expected to be moderate
for the Fund.
- Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of a relevant market index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
1
ANNUAL TOTAL RETURN--INVESTOR SHARES
[Bar Chart Range: -20% to 30%]
2001 7.61
2002 16.61
2003 8.00
2004 8.27
2005 2.59
2006 0.43
2007 11.59
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 7.96% (quarter ended September 30, 2002), and the lowest return for
a quarter was -3.04% (quarter ended June 30, 2004).
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2007
-------------------------------------------------------------------------------------------------------
Since
1 Year 5 Years Inception/1/
-------------------------------------------------------------------------------------------------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND INVESTOR SHARES
-------------------------------------------------------------------------------------------------------
Return Before Taxes 11.59% 6.10% 8.06%
-------------------------------------------------------------------------------------------------------
Return After Taxes on Distributions 9.50 4.36 6.21
-------------------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 7.44 4.20 5.85
-------------------------------------------------------------------------------------------------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND ADMIRAL SHARES/2/
-------------------------------------------------------------------------------------------------------
Return Before Taxes 11.69% -- --
-------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX
(reflects no deduction for fees, expenses, or taxes) 11.63% 6.27% 8.22%
-------------------------------------------------------------------------------------------------------
1 Since-inception returns are from June 29, 2000--the inception date of the Investor Shares--through
December 31, 2007.
2 From the inception of the Fund's Admiral Shares on June 10, 2005, through December 31, 2007, the
average annual total returns were 4.99% for the Admiral Shares and 4.97% for the Lehman Brothers
U.S. Treasury Inflation Notes Index.
|
NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns are shown only
for the Investor Shares and will differ for each share class in an amount
approximately equal to the difference in expense ratios. After-tax returns are
not relevant for a shareholder who holds fund shares in a tax--
2
deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in this prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended December 31, 2007.
SHAREHOLDER FEES
(Fees paid directly from your investment)
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None None
------------------------------------------------------------------------------------------------------------
Purchase Fee None None
------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None None
------------------------------------------------------------------------------------------------------------
Redemption Fee None/1/ None/1/
------------------------------------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/Year/2/ --
------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(Expenses deducted from the Fund's assets)
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------------------
Management Expenses 0.16% 0.07%
------------------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None None
------------------------------------------------------------------------------------------------------------
Other Expenses 0.04% 0.04%
------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.20% 0.11%
------------------------------------------------------------------------------------------------------------
1 A $5 fee applies to wire redemptions under $5,000.
2 If applicable, the account service fee will be collected by redeeming fund shares in the amount of $20.
|
3
The following examples are intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares with the cost of investing in other
mutual funds. They illustrate the hypothetical expenses that you would incur
over various periods if you invest $10,000 in the Fund's shares. These examples
assume that the Shares provide a return of 5% a year and that operating expenses
remain the same. The results apply whether or not you redeem your investment at
the end of the given period.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Investor Shares $20 $64 $113 $255
----------------------------------------------------------
Admiral Shares 11 35 62 141
----------------------------------------------------------
|
These examples should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
PLAIN TALK ABOUT FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets
of the fund. Vanguard Inflation-Protected Securities Fund's expense ratios in
fiscal year 2007 were as follows: for Investor Shares, 0.20%, or $2.00 per
$1,000 of average net assets; for Admiral Shares, 0.11%, or $1.10 per $1,000
of average net assets. The average Treasury inflation-protected securities
fund had expenses in 2007 of 0.90%, or $9.00 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
PLAIN TALK ABOUT COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
4
ADDITIONAL INFORMATION
As of December 31, 2007
------------------------------------------------------------------------------------------------
Net Assets (all share classes) $12.4 billion
------------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
------------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are distributed quarterly in March, June, September,
and December; capital gains, if any, are distributed annually
in December.
------------------------------------------------------------------------------------------------
Suitable for IRAs Yes
------------------------------------------------------------------------------------------------
INVESTOR SHARES ADMIRAL SHARES
------------------------------------------------------------------------------------------------
Inception Date June 29, 2000 June 10, 2005
------------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000 $100,000
------------------------------------------------------------------------------------------------
Conversion Features May be converted to Admiral May be converted to Investor
Shares if you meet eligibility shares if you are no longer
requirements eligible for Admiral Shares
------------------------------------------------------------------------------------------------
Newspaper Abbreviation InflaPro InfProAd
------------------------------------------------------------------------------------------------
Vanguard Fund Number 119 5119
------------------------------------------------------------------------------------------------
CUSIP Number 922031869 922031737
------------------------------------------------------------------------------------------------
Ticker Symbol VIPSX VAIPX
------------------------------------------------------------------------------------------------
|
5
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Note that the Fund's
investment objective is not fundamental and may be changed without a shareholder
vote. However, the Fund's policy of investing at least 80% of its assets in
inflation-indexed bonds may be changed only upon 60 days' notice to
shareholders.
MARKET EXPOSURE
The Fund invests mainly in a diversified group of investment-grade,
inflation-indexed bonds. As a result of this investment strategy, the Fund is
subject to certain risks.
6
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES
Unlike a conventional bond, whose issuer makes regular fixed interest
payments and repays the face value of the bond at maturity, an
inflation-indexed security (IIS) provides principal and interest payments
that are adjusted over time to reflect a rise (inflation) or a drop
(deflation) in the general price level for goods and services. This
adjustment is a key feature, given that the Consumer Price Index (CPI) has
risen in each of the past 50 years. (Source: Bureau of Labor Statistics.)
Importantly, in the event of deflation, the U.S. Treasury has guaranteed that
it will repay at least the face value of an IIS issued by the U.S.
government.
Inflation measurement and adjustment for an IIS have two important features.
There is a two-month lag between the time that inflation occurs in the
economy and when it is factored into IIS valuations. This is due to the time
required to measure and calculate the CPI and for the Treasury to adjust the
inflation accrual schedules for an IIS. For example, inflation that occurs in
January is calculated and announced during February and affects IIS
valuations throughout the month of March. In addition, the inflation index
used is the non-seasonally adjusted index. It differs from the CPI that is
reported by most news organizations, which is statistically smoothed to
overcome highs and lows observed at different points each year. The use of
the non-seasonally adjusted index can cause the Fund's income level to
fluctuate.
[FLAG]
The Fund is subject to income fluctuations. The Fund's quarterly income
distributions are likely to fluctuate considerably more than the income
distributions of a typical bond fund. Income fluctuations associated with
CHANGES IN INTEREST RATES are expected to be low; however, income fluctuations
resulting from CHANGES IN INFLATION are expected to be high. Overall, investors
can expect income fluctuations to be high for the Fund.
While fluctuations in quarterly income distributions are expected to be high,
distributions should, over the long term, provide an income yield that exceeds
inflation. That said, in periods of extreme deflation, the Fund may have no
income at all to distribute.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
The Fund is subject to interest rate risk, which is the chance that bond prices
overall will decline because of rising interest rates. Interest rate risk
should be moderate for the Fund.
7
PLAIN TALK ABOUT REAL RETURNS
Inflation-indexed securities are designed to provide a "real rate of
return"--a return after adjusting for the impact of inflation. Inflation--a
rise in the general price level--erodes the purchasing power of an investor's
portfolio. For example, if an investment provides a "nominal" total return of
5% in a given year and inflation is 2% during that period, the
inflation-adjusted, or real, return is 3%. Inflation, as measured by the CPI,
has occurred in each of the past 50 years, so investors should be conscious
of both the nominal and the real returns on their investments. Investors in
inflation-indexed bond funds who do not reinvest the portion of the income
distribution that comes from inflation adjustments will not maintain the
purchasing power of the investment over the long term. This is because
interest earned depends on the amount of principal invested, and that
principal won't grow with inflation if the investor does not reinvest the
principal adjustment paid out as part of a fund's income distributions.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND INTEREST RATES
Interest rates on conventional bonds have two primary components: a "real"
yield and an increment that reflects investor expectations of future
inflation. By contrast, interest rates on an IIS are adjusted for inflation
and, therefore, aren't affected meaningfully by inflation expectations. This
leaves only real rates to influence the price of an IIS. A rise in real rates
will cause the price of an IIS to fall, while a decline in real rates will
boost the price of an IIS.
[FLAG]
The Fund is subject, to a limited extent, to credit risk, which is the chance
that a bond issuer will fail to pay interest and principal in a timely manner,
or that negative perceptions of the issuer's ability to make such payments will
cause the price of that bond to decline.
The credit quality of the Fund depends on the quality of its investments.
Because the Fund emphasizes securities backed by the full faith and credit of
the U.S. government, the average credit quality of the Fund's holdings is
expected to be high and, consequently, credit risk should be low for the Fund.
As of December 31, 2007, the dollar-weighted average credit quality of the
Fund's holdings, as rated by Moody's Investors Service, Inc., was Aaa. At a
minimum, all bonds purchased by the Fund will be rated investment-grade (in one
of the four highest rating categories) or will be unrated bonds considered by
the advisor to be investment-grade.
8
PLAIN TALK ABOUT CREDIT QUALITY
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND TAXES
Any increase in principal for an IIS resulting from inflation adjustments is
considered by the IRS to be taxable income in the year it occurs. For direct
holders of an IIS, this means that taxes must be paid on principal
adjustments even though these amounts are not received until the bond
matures. By contrast, a mutual fund holding IISs pays out (to shareholders)
both interest income and the income attributable to principal adjustments
each quarter in the form of cash or reinvested shares, and the shareholders
must pay taxes on the distributions.
SECURITY SELECTION
The Fund emphasizes inflation-indexed bonds issued by the U.S. government,
although it may also purchase inflation-indexed bonds issued by agencies and
instrumentalities of the U.S. government and by corporations. The Fund may
invest in bonds of any maturity, but is expected to maintain a dollar-weighted
average maturity in the range of 7 to 20 years.
The Vanguard Group (Vanguard), advisor to the Fund, buys and sells securities
based on its judgment about issuers, the prices of the securities, and other
economic factors. While the advisor uses the Lehman Brothers U.S. Treasury
Inflation Notes Index as a benchmark for the Fund's performance, the Fund's
average maturity and mix of bonds may differ from those of the index. This may
occur, for example, when the advisor sees an opportunity to enhance returns.
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
9
The Fund is generally managed without regard to tax ramifications.
OTHER INVESTMENT POLICIES AND RISKS
Up to 20% of the Fund's assets may be invested in holdings that are not
inflation-indexed. The Fund typically will make such investments when
inflation-indexed bonds are less attractive. The Fund's non-inflation-indexed
holdings may include the following:
- Corporate debt obligations--usually called bonds--represent loans by an
investor to a corporation.
- U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
- Cash investments is a blanket term that describes a variety of short-term
fixed income investments, including money market instruments, commercial paper,
bank certificates of deposit, banker's acceptances, and repurchase agreements.
Repurchase agreements represent short-term (normally overnight) loans by the
Fund to commercial banks or large securities dealers.
- Illiquid securities are securities that the Fund may not be able to sell in
the ordinary course of business. The Fund may invest up to 15% of its net assets
in these securities. Restricted securities are a special type of illiquid
security; these securities have not been publicly issued and legally can be
resold only to qualified buyers. From time to time, the board of trustees may
determine that particular restricted securities are not illiquid, and those
securities may then be purchased by the Fund without limit.
- Mortgage dollar rolls are transactions in which the Fund sells mortgage-backed
securities to a dealer and simultaneously agrees to purchase similar securities
in the future at a predetermined price. These transactions simulate an
investment in mortgage-backed securities and have the potential to enhance the
Fund's returns and reduce its administrative burdens, compared with holding
mortgage-backed securities directly. These transactions may increase the Fund's
portfolio turnover rate. Mortgage dollar rolls will be used only if consistent
with the Fund's investment objective and risk profile.
10
[FLAG]
The Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Fund
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
- Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
- Add value when these instruments are attractively priced; or
- Adjust sensitivity to changes in interest rates.
The Fund's derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
CASH MANAGEMENT
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
11
TEMPORARY INVESTMENT MEASURES
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
FREQUENT TRADING OR MARKET-TIMING
BACKGROUND. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
POLICIES TO ADDRESS FREQUENT TRADING. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
12
- Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the INVESTING WITH
VANGUARD section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
- Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the SHARE PRICE
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for intermediate government funds was approximately 247%, as reported by
Morningstar, Inc., on December 31, 2007.
PLAIN TALK ABOUT TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
13
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
INVESTMENT ADVISOR
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began
operations in 1975, serves as advisor to the Fund through its Fixed Income
Group. As of December 31, 2007, Vanguard served as advisor for approximately $1
trillion in assets. Vanguard manages the Fund on an at-cost basis, subject to
the supervision and oversight of the trustees and officers of the Fund.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended July 31, 2007 (or June 30, 2008).
GEORGE U. SAUTER is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index
14
bond funds, stable value portfolios, and money market funds. Since joining
Vanguard in 1987, Mr. Sauter has been a key contributor to the development of
Vanguard's stock indexing and active quantitative equity investment strategies.
He received his A.B. in Economics from Dartmouth College and an M.B.A. in
Finance from the University of Chicago.
ROBERT F. AUWAERTER is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS
The managers primarily responsible for the day-to-day management of the Fund
are:
JOHN W. HOLLYER, CFA, Principal of Vanguard. He has managed investment
portfolios since joining Vanguard in 1989 and has co-managed the Fund since
its inception. Education: B.S., University of Pennsylvania.
KENNETH E. VOLPERT, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; and has co-managed the Fund since its inception.
Education: B.S., University of Illinois; M.B.A., University of Chicago.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. In certain circumstances, the Fund also may distribute return of
capital. Income dividends generally are distributed quarterly in March, June,
September, and December; capital gains distributions generally occur annually in
December. In addition, the Fund may occasionally be required to make
supplemental distributions at some other time during the year. You can receive
distributions of income or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
15
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
PLAIN TALK ABOUT RETURN OF CAPITAL
Return of capital is the portion of a distribution representing the return of
your original investment in the Fund. Return of capital reduces your cost
basis in the Fund's shares, and is not taxable to you until your cost basis
has been reduced to zero. During periods of deflation, the Fund's
inflation-indexed bonds may experience a downward adjustment in their value.
If the downward adjustment more than offsets the income earned by the bonds,
the adjustment may cause a portion of the dividends previously distributed to
shareholders and classified as income to be reclassified as return of
capital.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
- Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of January--are
taxable for federal income tax purposes as if received in December.
- Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
16
- Your cost basis in the Fund will be decreased by the amount of any return of
capital that you receive. This, in turn, will affect the amount of any capital
gain or loss that you realize when selling or exchanging your Fund shares.
- Return-of-capital distributions generally are not taxable to you, unless your
cost basis has been reduced to zero. If your cost basis is at zero,
return-of-capital distributions will be treated as capital gains.
- A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
government may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this exemption.
- Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
- Provide us with your correct taxpayer identification number;
- Certify that the taxpayer identification number is correct; and
- Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax advisor for detailed information about
a fund's tax consequences for you.
17
PLAIN TALK ABOUT "BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund makes a distribution, because doing so can cost you money in
taxes. This is known as "buying a dividend." For example: On December 15, you
invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price will drop to $19
(not counting market change). You still have only $5,000 (250 shares x $19 =
$4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
owe tax on the $250 distribution you received--even if you reinvest it in
more shares. To avoid "buying a dividend," check a fund's distribution
schedule before you invest.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
18
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Fund's financial performance for the periods shown, and certain information
reflects financial results for a single Fund share. The total returns in each
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report--along with the Fund's financial statements--is included in the
Fund's most recent annual report to shareholders. To receive a free copy of the
latest annual or semiannual report, you may access a report online at
www.vanguard.com, or you may contact Vanguard by telephone or by mail.
19
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Fund's Investor Shares as an example. The Investor
Shares began the fiscal year ended December 31, 2007, with a net asset value
(price) of $11.80 per share. During the year, each Investor Share earned
$0.651 from investment income (interest) and $0.646 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.647 per share in the form of dividend distributions.
There was no return of capital. A portion of each year's distributions may
come from the prior year's income or capital gains.
The share price at the end of the year was $12.45, reflecting earnings of
$1.297 per share and distributions of $0.647 per share. This was an increase
of $0.65 per share (from $11.80 at the beginning of the year to $12.45 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 11.40% for the year.
As of December 31, 2007, the Investor Shares had approximately $6.7 billion
in net assets. For the year, the annualized expense ratio was 0.20% ($2.00
per $1,000 of net assets), and the annualized net investment income amounted
to 5.92% of average net assets. The Fund sold and replaced securities valued
at an annualized rate of 21% of its net assets.
20
INFLATION-PROTECTED SECURITIES FUND INVESTOR SHARES
Feb. 1,
2007 to Year Ended January 31,
Dec. 31, -----------------------------------------------------
2007/1/ 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.80 $12.18 $12.57 $12.36 $11.91 $10.68
--------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
--------------------------------------------------------------------------------------------------------
Net Investment Income .651 .483 .573 .596 .41 .47
--------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .646 (.437) (.230) .244 .61 1.28
--------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.297 .046 .343 .840 1.02 1.75
--------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
--------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.647) (.407) (.681) (.565) (.45) (.46)
--------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.052) (.065) (.12) (.06)
--------------------------------------------------------------------------------------------------------
Return of Capital -- (.019) -- -- -- --
--------------------------------------------------------------------------------------------------------
Total Distributions (.647) (.426) (.733) (.630) (.57) (.52)
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.45 $11.80 $12.18 $12.57 $12.36 $11.91
========================================================================================================
TOTAL RETURN/2/ 11.40% 0.43% 2.76% 6.96% 8.69% 16.64%
========================================================================================================
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $6,662 $5,361 $6,227 $7,530 $5,164 $3,143
--------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.20%/3/ 0.20% 0.20% 0.17% 0.18% 0.22%
--------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.92%/3/ 3.87% 4.83% 4.83% 3.46% 4.55%
--------------------------------------------------------------------------------------------------------
Turnover Rate 21% 53% 47% 73% 63% 108%
========================================================================================================
1 The Fund's fiscal year-end changed from January 31 to December 31, effective December 31, 2007.
2 Total returns do not include the account service fee that may be applicable to certain accounts with
balances below $10,000.
3 Annualized.
|
21
INFLATION-PROTECTED SECURITIES FUND ADMIRAL SHARES
Feb. 1, Year June 10,
2007 to Ended 2005/2/ to
Dec. 31, Jan. 31, Jan. 31,
2007/1/ 2007 2006
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $23.17 $23.91 $25.00
--------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
--------------------------------------------------------------------------------------------------------
Net Investment Income 1.299 .971 .683
--------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 1.278 (.858) (.432)
--------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.577 .113 .251
--------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
--------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (1.297) (.815) (1.315)
--------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.026)
--------------------------------------------------------------------------------------------------------
Return of Capital -- (.038) --
--------------------------------------------------------------------------------------------------------
Total Distributions (1.297) (.853) (1.341)
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $24.45 $23.17 $23.91
========================================================================================================
TOTAL RETURN 11.54% 0.53% 1.02%
========================================================================================================
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $3,487 $2,523 $2,474
--------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11%/3/ 0.11% 0.11%/3/
--------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 6.01%/3/ 3.96% 4.92%/3/
--------------------------------------------------------------------------------------------------------
Turnover Rate 21% 53% 47%
========================================================================================================
1 The Fund's fiscal year-end changed from January 31 to December 31, effective December 31, 2007.
2 Inception.
3 Annualized.
|
22
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
Each fund you hold in an account is a separate "fund account." For example, if
you hold three funds in a nonretirement account titled in your own name, two
funds in a nonretirement account titled jointly with your spouse, and one fund
in an individual retirement account, you have six fund accounts--and this is
true even if you hold the same fund in multiple accounts.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
ACCOUNT MINIMUMS FOR INVESTOR SHARES
TO OPEN AND MAINTAIN AN ACCOUNT. $3,000.
TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
ACCOUNT MINIMUMS FOR ADMIRAL SHARES
TO OPEN AND MAINTAIN AN ACCOUNT. $100,000 for new investors. Shareholders who
are registered on Vanguard.com, have held shares of the Fund for ten years, and
have $50,000 or more in the same Fund account are eligible to convert their
Investor Shares to Admiral Shares. See Converting Shares. Institutional clients
should contact Vanguard for information on special rules that may apply to them.
TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
HOW TO INITIATE A PURCHASE REQUEST
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your purchase request.
ONLINE. You may open certain types of accounts, request an electronic bank
transfer, and make an exchange (using the proceeds from the redemption of shares
from one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund) through our website at www.vanguard.com if you are a registered user.
23
BY TELEPHONE. You may call Vanguard to begin the account registration process
or request that the account-opening forms be sent to you. You may also request a
purchase of shares by wire, by electronic bank transfer, or by an exchange. See
Contacting Vanguard.
BY MAIL. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. For a list of Vanguard
addresses, see Contacting Vanguard.
HOW TO PAY FOR A PURCHASE
BY ELECTRONIC BANK TRANSFER. You may purchase shares of a Vanguard fund through
an electronic transfer of money held in a designated bank account. To establish
the electronic bank transfer option on an account, you must designate a bank
account online, complete a special form, or fill out the appropriate section of
your account registration form. After the option is set up on your account, you
can purchase shares by electronic bank transfer on a regular schedule (Automatic
Investment Plan) or whenever you wish. Your purchase request can be initiated
online, by telephone, or by mail.
BY WIRE. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. See
Contacting Vanguard.
BY CHECK. You may send a check to make initial or additional purchases to your
fund account. Also see How to Initiate a Purchase Request: By mail. Make your
check payable to Vanguard and include the appropriate fund number (e.g.,
Vanguard--xx). For a list of Fund numbers (for share classes in this
prospectus), see Contacting Vanguard.
BY EXCHANGE. You may purchase shares of a Vanguard fund using the proceeds from
the simultaneous redemption of shares from another Vanguard fund. You may
initiate an exchange online (if you are a registered user of Vanguard.com), by
telephone, or by mail. See Exchanging Shares.
TRADE DATE
The trade date for any purchase request received in good order will depend on
the day and time Vanguard receives your request, the manner in which you are
paying, and the type of fund you are purchasing. Your purchase will be executed
using the fund's NAV as calculated on the trade date. NAVs are calculated only
on days the New York Stock Exchange (NYSE) is open for trading (a business day).
For purchases by CHECK into all funds other than money market funds, and for
purchases by EXCHANGE or WIRE into all funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the purchase request is
24
received on a business day after the close of regular trading on the NYSE, or on
a nonbusiness day, the trade date will be the next business day.
For purchases by CHECK into money market funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the next
business day. If the purchase request is received on a business day after the
close of regular trading on the NYSE, or on a nonbusiness day, the trade date
will be the second business day following the day Vanguard receives the purchase
request. Because money market instruments must be purchased with federal funds
and it takes a money market mutual fund one business day to convert check
proceeds into federal funds, the trade date will be one business day later than
for other funds.
For purchases by electronic bank transfer using an AUTOMATIC INVESTMENT PLAN:
Your trade date generally will be one business day before the date you
designated for withdrawal from your bank account.
For purchases by ELECTRONIC BANK TRANSFER not using an Automatic Investment
Plan: If the purchase request is received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the next business day. If the
purchase request is received on a business day after 10 p.m., Eastern time, or
on a nonbusiness day, the trade date will be the second business day following
the day Vanguard receives the request.
If your purchase request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
OTHER PURCHASE RULES YOU SHOULD KNOW
ADMIRAL SHARES. Please note that Admiral Shares are not available for:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special administrative services from
Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
CHECK PURCHASES. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
NEW ACCOUNTS. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves
25
the right, without prior notice, to close your account or take such other steps
as we deem reasonable.
REFUSED OR REJECTED PURCHASE REQUESTS. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
LARGE PURCHASES. Please call Vanguard before attempting to invest a large
dollar amount.
NO CANCELLATIONS. Vanguard will not accept your request to cancel any purchase
request once processing has begun. Please be careful when placing a purchase
request.
CONVERTING SHARES
When a conversion occurs, you receive shares of one class in place of shares of
another class of the same fund. At the time of conversion, the dollar value of
the "new" shares you receive equals the dollar value of the "old" shares that
were converted. In other words, the conversion has no effect on the value of
your investment in the fund. However, the number of shares you own after the
conversion may be greater than or less than the number of shares you owned
before the conversion, depending on the net asset values of the two share
classes.
A conversion between share classes of the same fund is a nontaxable event.
TRADE DATE
The trade date for any conversion request received in good order will depend on
the day and time Vanguard receives your request. Your conversion will be
executed using the NAV of the different share classes on the trade date. NAVs
are calculated only on days the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close
of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day. For a conversion request received on a business day after
the close of regular trading on the NYSE, or on a nonbusiness day, the trade
date will be the next business day. See Other Rules You Should Know.
26
CONVERSIONS FROM INVESTOR SHARES TO ADMIRAL SHARES
SELF-DIRECTED CONVERSIONS. If your account balance in the Fund is at least
$100,000, you may ask Vanguard to convert your Investor Shares to Admiral
Shares. You can make conversion requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Contacting Vanguard.
AUTOMATIC CONVERSIONS. Vanguard conducts periodic reviews of account balances
and may, if your account balance in the Fund exceeds $100,000, automatically
convert your Investor Shares to Admiral Shares. You will be notified before an
automatic conversion occurs and will have an opportunity to instruct Vanguard
not to effect the conversion.
TENURE CONVERSIONS. You are eligible for a tenure conversion from Investor
Shares to Admiral Shares if you have had an account in the Fund for ten years,
that account balance is at least $50,000, and you are registered with
Vanguard.com. You may request a tenure conversion online, by telephone, or by
mail.
CONVERSIONS TO INSTITUTIONAL SHARES
You are eligible for a self-directed conversion from another share class to
Institutional Shares of the same Fund, provided that your account meets all
Institutional Shares' eligibility requirements. Registered users of our website,
www.vanguard.com, may request a conversion online, or you may contact Vanguard
by telephone or by mail to request this transaction. Accounts that qualify for
Institutional Shares will not be automatically converted.
MANDATORY CONVERSIONS TO ANOTHER SHARE CLASS
If an account no longer meets the balance requirements for a share class,
Vanguard may automatically convert the shares in the account to another share
class, as appropriate. A decline in the account balance because of market
movement may result in such a conversion. Vanguard will notify the investor in
writing before any mandatory conversion occurs.
REDEEMING SHARES
HOW TO INITIATE A REDEMPTION REQUEST
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your redemption request.
ONLINE. You may redeem shares, request an electronic bank transfer, and make an
exchange (the purchase of shares of one Vanguard fund using the proceeds of a
simultaneous redemption from another Vanguard fund) through our website at
www.vanguard.com if you are a registered user.
27
BY TELEPHONE. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
BY MAIL. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. See Contacting Vanguard.
BY WRITING A CHECK. If you've established the checkwriting service on your
account, you can redeem shares by writing a check for $250 or more.
HOW TO RECEIVE REDEMPTION PROCEEDS
BY ELECTRONIC BANK TRANSFER. You may have the proceeds of a fund redemption
sent directly to a designated bank account. To establish the electronic bank
transfer option, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can redeem shares by electronic
bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or
whenever you wish ($100 minimum). Your transaction can be initiated online, by
telephone, or by mail.
BY WIRE. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
BY EXCHANGE. You may have the proceeds of a Vanguard fund redemption invested
directly in shares of another Vanguard fund. You may initiate an exchange online
(if you are a registered user of Vanguard.com), by telephone, or by mail.
BY CHECK. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
TRADE DATE
The trade date for any redemption request received in good order will depend on
the day and time Vanguard receives your request and the manner in which you are
redeeming. Your redemption will be executed using the fund's NAV as calculated
on the trade date. NAVs are calculated only on days that the NYSE is open for
trading (a business day.)
28
For redemptions by CHECK, EXCHANGE, or WIRE: If the redemption request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the redemption request is received on a business day after the close of
regular trading on the NYSE, or on a nonbusiness day, the trade date will be the
next business day.
- Note on timing of wire redemptions from money market funds: For telephone
requests received by Vanguard on a business day before 10:45 a.m., Eastern
time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the
redemption proceeds will leave Vanguard by the close of business the same day.
For telephone requests received by Vanguard on a business day after those
cut-off times, or on a nonbusiness day, and for all requests other than by
telephone, the redemption proceeds will leave Vanguard by the close of
business on the next business day.
- Note on timing of wire redemptions from bond funds: For requests received by
Vanguard on a business day before the close of regular trading on the NYSE
(generally 4 p.m., Eastern time), the redemption proceeds will leave Vanguard
by the close of business on the next business day. For requests received by
Vanguard on a business day after the close of regular trading on the NYSE, or
on a nonbusiness day, the redemption proceeds will leave Vanguard by the close
of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an AUTOMATIC WITHDRAWAL PLAN:
Your trade date generally will be the date you designated for withdrawal of
funds (redemption of shares) from your Vanguard account. Proceeds of redeemed
shares generally will be credited to your designated bank account two business
days after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For redemptions by ELECTRONIC BANK TRANSFER not using an Automatic Withdrawal
Plan: If the redemption request is received by Vanguard on a business day before
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the
trade date generally will be the same day. If the redemption request is received
on a business day after the close of regular trading on the NYSE, or on a
nonbusiness day, the trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
29
OTHER REDEMPTION RULES YOU SHOULD KNOW
DOCUMENTATION FOR CERTAIN ACCOUNTS. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, or
retirement accounts. Please call us before attempting to redeem from these types
of accounts.
POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in market-timing
or frequent trading. Under these circumstances, Vanguard also reserves the right
to delay payment of the redemption proceeds for up to seven calendar days. By
calling us before you attempt to redeem a large dollar amount, you may avoid
in-kind or delayed payment of your redemption. Please see Frequent-Trading
Limits for information about Vanguard's policies to limit frequent trading.
RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds
may not be made available to you until the fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
ADDRESS CHANGE. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
PAYMENT TO A DIFFERENT PERSON OR ADDRESS. At your request, we can make your
redemption check payable, or wire your redemption proceeds, to a different
person or send it to a different address. However, this requires the written
consent of all registered account owners and may require a signature guarantee.
You can obtain a signature guarantee from most commercial and savings banks,
credit unions, trust companies, or member firms of a U.S. stock exchange. A
notary public cannot provide a signature guarantee.
NO CANCELLATIONS. Vanguard will not accept your request to cancel any
redemption request once processing has begun. Please be careful when placing a
redemption request.
EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
30
EXCHANGING SHARES
An exchange occurs when you use the proceeds from the redemption of shares of
one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund. You can make exchange requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming
Shares.
If the NYSE is open for regular trading (a business day) at the time an exchange
request is received in good order, the trade date will generally be the same
day. See Other Rules You Should Know--Good Order for additional information on
all transaction requests.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
- Purchases of shares with reinvested dividend or capital gains distributions.
- Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
- Redemptions of shares to pay fund or account fees.
- Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
- Transfers and re-registrations of shares within the same fund.
- Purchases of shares by asset transfer or direct rollover.
- Conversions of shares from one share class to another in the same fund.
- Checkwriting redemptions.
- Section 529 college savings plans.
31
- Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
- Purchases of shares with participant payroll or employer contributions or
loan repayments.
- Purchases of shares with reinvested dividend or capital gains distributions.
- Distributions, loans, and in-service withdrawals from a plan.
- Redemptions of shares as part of a plan termination or at the direction of the
plan.
- Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
- Redemptions of shares to pay fund or account fees.
- Share or asset transfers or rollovers.
- Re-registrations of shares.
- Conversions of shares from one share class to another in the same fund.
- Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
ACCOUNTS HELD BY INSTITUTIONS (OTHER THAN DEFINED CONTRIBUTION PLANS)
Vanguard will systematically monitor for frequent trading in institutional
clients' accounts. If we detect suspicious trading activity, we will investigate
and take appropriate action, which may include applying to a client's accounts
the 60-day policy previously described, prohibiting a client's purchases of fund
shares, and/or eliminating the client's exchange privilege.
ACCOUNTS HELD BY INTERMEDIARIES
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
32
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
PROSPECTUS AND SHAREHOLDER REPORT MAILINGS
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
VANGUARD.COM
REGISTRATION. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
ELECTRONIC DELIVERY. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under
"Account Profile." You can revoke your electronic consent at any time, and we
will begin to send paper copies of these documents within 30 days of receiving
your notice.
TELEPHONE TRANSACTIONS
AUTOMATIC. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
TELE-ACCOUNT/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
33
PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
- Authorization to act on the account (as the account owner or by legal
documentation or other means).
- Account registration and address.
- Fund name and account number, if applicable.
- Other information relating to the caller, the account holder, or the account.
SUBJECT TO REVISION. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
GOOD ORDER
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
- The fund name and account number.
- The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
- Signatures of all registered owners.
- Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
- Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
FUTURE TRADE-DATE REQUESTS
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
ACCOUNTS WITH MORE THAN ONE OWNER
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
34
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private, and immediately review any account
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
ACCOUNT SERVICE FEE
For most shareholders, Vanguard deducts a $20 account service fee from all fund
accounts that have a balance below $10,000 for any reason, including market
fluctuation. The account service fee applies to both retirement and
nonretirement fund accounts. The fee will be assessed on fund accounts in all
Vanguard funds, regardless of a fund's minimum investment amount. The account
service fee, which will be collected by redeeming fund shares in the amount of
$20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of
statements, reports, and other materials for all of your fund accounts, the
account service fee for balances below $10,000 will not be charged, so long as
that election remains in effect.
35
The account service fee also does not apply to the following:
- Money market sweep accounts held through Vanguard Brokerage Services/(R)/.
- Accounts held through intermediaries.
- Accounts held by Voyager, Voyager Select, and Flagship clients. Membership is
based on total household assets held at Vanguard, with a minimum of $100,000 to
qualify for Vanguard Voyager Services/TM/, $500,000 for Vanguard Voyager Select
Services/TM/, and $1 million for Vanguard Flagship Services/TM/. Vanguard
determines membership by aggregating assets of all eligible accounts held by the
investor and immediate family members who reside at the same address. Aggregate
assets include investments in Vanguard mutual funds, Vanguard ETFs/TM/,
annuities through Vanguard, the Vanguard 529 Plan, certain small-business
accounts, and employer-sponsored retirement plans for which Vanguard provides
recordkeeping services.
- Participant accounts in employer-sponsored defined contribution plans (other
than those served by the Vanguard Small Business Services Department, which are
subject to various fee structures). Please consult your enrollment materials for
the rules that apply to your account.
- Section 529 college savings plans.
LOW-BALANCE ACCOUNTS
The Fund reserves the right, without prior notice, to liquidate any
investment-only retirement-plan fund account or any nonretirement fund account
whose balance falls below the minimum initial investment for any reason,
including market fluctuation. Shares redeemed in accordance with this policy
will be subject to applicable redemption fees.
RIGHT TO CHANGE POLICIES
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon initial notification to Vanguard of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at
36
the sole discretion of Vanguard management, we reasonably believe they are
deemed to be in the best interest of a fund.
SHARE CLASSES
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
FUND AND ACCOUNT UPDATES
CONFIRMATION STATEMENTS
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
PORTFOLIO SUMMARIES
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
TAX STATEMENTS
For most taxable accounts, we will send annual tax statements to assist you in
preparing your income tax returns. These statements, which are generally mailed
in January, will report the previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs and
other retirement plans. These statements can be viewed online.
37
AVERAGE-COST REVIEW STATEMENTS
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
ANNUAL AND SEMIANNUAL REPORTS
We will send (or provide online, whichever you prefer) financial reports about
Vanguard Inflation-Protected Securities Fund twice a year, in February and
August. These comprehensive reports include overviews of the financial markets
and provide the following specific Fund information:
- Performance assessments and comparisons with industry benchmarks.
- Reports from the advisor.
- Financial statements with listings of Fund holdings.
PORTFOLIO HOLDINGS
We generally post on our website at www.vanguard.com, in the HOLDINGS section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
38
CONTACTING VANGUARD
WEB
------------------------------------------------------------------------------------------------------------
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days a week For fund, account, and service information
For most account transactions
For literature requests
------------------------------------------------------------------------------------------------------------
PHONE
------------------------------------------------------------------------------------------------------------
Vanguard Tele-Account/(R)/ 800-662-6273 For automated fund and account information
(ON-BOARD) For exchange transactions (subject to limitations)
Toll-free, 24 hours a day, 7 days a week
------------------------------------------------------------------------------------------------------------
Investor Information 800-662-7447 (SHIP) For fund and service information
(Text telephone for people with hearing For literature requests
impairment at 800-952-3335) Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Client Services 800-662-2739 (CREW) For account information
(Text telephone for people with hearing For most account transactions
impairment at 800-749-7273) Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Admiral Service Center For Admiral account information
888-237-9949 For most Admiral transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
------------------------------------------------------------------------------------------------------------
Intermediary Sales Support For information and services for financial intermediaries
800-997-2798 including broker-dealers, trust institutions, insurance
companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to 7 p.m.,
Eastern time
------------------------------------------------------------------------------------------------------------
|
39
VANGUARD ADDRESSES
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
REGULAR MAIL (INDIVIDUALS) The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
----------------------------------------------------------------------
REGULAR MAIL (INSTITUTIONS) The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
----------------------------------------------------------------------
REGISTERED, EXPRESS, OR OVERNIGHT The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
|
FUND NUMBERS
Please use the specific fund number when contacting us:
Investor Shares Admiral Shares
-------------------------------------------------------------------------------
Vanguard Inflation-Protected Securities Fund 119 5119
-------------------------------------------------------------------------------
|
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard ETFs, Vanguard Small Business
Online, Vanguard Brokerage Services, Vanguard Voyager Services, Voyager,
Vanguard Voyager Select Services, Voyager Select, Vanguard Flagship Services,
Flagship, and the ship logo are trademarks of The Vanguard Group, Inc. CFA/(R)/
is a trademark owned by CFA Institute. All other marks are the exclusive
property of their respective owners.
40
GLOSSARY OF INVESTMENT TERMS
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity and are repaid. In general, the longer the average maturity, the more a
fund's share price fluctuates in response to changes in market interest rates.
In calculating average maturity, a fund uses a bond's maturity or, if
applicable, an earlier date on which the advisor believes it is likely that a
maturity-shortening device (such as a call, put, refunding, prepayment or
redemption provision, or an adjustable coupon) will cause the bond to be repaid.
BOND. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
CAPITAL GAINS DISTRIBUTION. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
CASH INVESTMENTS. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
COUPON. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
DIVIDEND DISTRIBUTION. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
FACE VALUE. The amount to be paid at a bond's maturity; also known as the par
value or principal.
FIXED INCOME SECURITY. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
INCEPTION DATE. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
INFLATION-INDEXED SECURITIES. Bonds issued by the U.S. government, government
agencies, or corporations, whose principal and interest payments--unlike those
of conventional bonds--are adjusted over time to reflect inflation.
41
INVESTMENT-GRADE BOND. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
MATURITY. The date when a bond issuer agrees to repay the bond's principal, or
face value, to the bond's buyer.
NET ASSET VALUE (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
PRINCIPAL. The face value of a debt instrument or the amount of money put into
an investment.
RETURN OF CAPITAL. A return of all or part of your original investment in the
Fund. In general, return of capital reduces your cost basis in a Fund's shares
and is not taxable to you, but return of capital after your cost basis has been
reduced to zero is taxable as capital gains.
SECURITIES. Stocks, bonds, money market instruments, and other investment
vehicles.
TOTAL RETURN. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
VOLATILITY. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
YIELD. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
42
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[SHIP LOGO] [VANGUARD/(R)/ LOGO]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
FOR MORE INFORMATION
If you would like more information about Vanguard Inflation-Protected Securities
Fund, the following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P119 042008
VANGUARD/(R)/ INFLATION-PROTECTED
SECURITIES FUND
> PROSPECTUS
INVESTOR SHARES FOR PARTICIPANTS
April 25, 2008
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
This prospectus contains financial data for the Fund through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
-----------------------------------------------------------------------------------------------
Fund Profile 1 Financial Highlights 17
-----------------------------------------------------------------------------------------------
More on the Fund 5 Investing With Vanguard 20
-----------------------------------------------------------------------------------------------
The Fund and Vanguard 13 Accessing Fund Information by Computer 23
-----------------------------------------------------------------------------------------------
Investment Advisor 14 Glossary of Investment Terms 24
-----------------------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes 15
-----------------------------------------------------------------------------------------------
Share Price 16
-----------------------------------------------------------------------------------------------
|
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Fund's Investor Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 800-662-7447.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE COMPANY OR ANY OTHER GOVERNMENT
AGENCY.
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide inflation protection and income consistent with
investment in inflation-indexed securities.
PRIMARY INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in inflation-indexed bonds issued by
the U.S. government, its agencies and instrumentalities, and corporations. The
Fund may invest in bonds of any maturity; however, its dollar-weighted average
maturity is expected to be in the range of 7 to 20 years. At a minimum, all
bonds purchased by the Fund will be rated "investment-grade." For additional
information on the Fund's investment strategies, please see MORE ON THE FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Income fluctuations. The Fund's quarterly income distributions are likely to
fluctuate considerably more than the income distributions of a typical bond
fund. Income fluctuations associated with changes in interest rates are expected
to be low; however, income fluctuations associated with changes in inflation are
expected to be high. Overall, investors can expect income fluctuations to be
high for the Fund.
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk is expected to be moderate
for the Fund.
- Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of a relevant market index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
1
ANNUAL TOTAL RETURNS--INVESTOR SHARES
[Bar Chart Range: -20% to 30%]
2001 7.61
2002 16.61
2003 8.00
2004 8.27
2005 2.59
2006 0.43
2007 11.59
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 7.96% (quarter ended September 30, 2002), and the lowest return for
a quarter was -3.04% (quarter ended June 30, 2004).
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2007
Since
1 Year 5 Years Inception/1/
-------------------------------------------------------------------------------------------------------------------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND INVESTOR SHARES 11.59% 6.10% 8.06%
-------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX
(reflects no deduction for fees or expenses) 11.63% 6.27% 8.22%
-------------------------------------------------------------------------------------------------------------------------
1 Since-inception returns are from June 29, 2000--the inception date of the Investor Shares--through December 31, 2007.
|
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
2
SHAREHOLDER FEES
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.16%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.20%
-------------------------------------------------------------------------
|
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$20 $64 $113 $255
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
3
PLAIN TALK ABOUT FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets
of the fund. Vanguard Inflation-Protected Securities Fund Investor Shares'
expense ratio in fiscal year 2007 was 0.20%, or $2.00 per $1,000 of average
net assets. The average Treasury inflation-protected securities fund had
expenses in 2007 of 0.90%, or $9.00 per $1,000 of average net assets (derived
from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
PLAIN TALK ABOUT COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
ADDITIONAL INFORMATION
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $12.4 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are distributed quarterly in March, June,
September, and December; capital gains, if any, are
distributed annually in December.
-----------------------------------------------------------------------------------------------
Inception Date June 29, 2000
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation InflaPro
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 119
-----------------------------------------------------------------------------------------------
CUSIP Number 922031869
-----------------------------------------------------------------------------------------------
Ticker Symbol VIPSX
-----------------------------------------------------------------------------------------------
|
4
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Note that the Fund's
investment objective is not fundamental and may be changed without a shareholder
vote. However, the Fund's policy of investing at least 80% of its assets in
inflation-indexed bonds may be changed only upon 60 days' notice to
shareholders.
MARKET EXPOSURE
The Fund invests mainly in a diversified group of investment-grade,
inflation-indexed bonds. As a result of this investment strategy, the Fund is
subject to certain risks.
5
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES
Unlike a conventional bond, whose issuer makes regular fixed interest
payments and repays the face value of the bond at maturity, an
inflation-indexed security (IIS) provides principal and interest payments
that are adjusted over time to reflect a rise (inflation) or a drop
(deflation) in the general price level for goods and services. This
adjustment is a key feature, given that the Consumer Price Index (CPI) has
risen in each of the past 50 years. (Source: Bureau of Labor Statistics.)
Importantly, in the event of deflation, the U.S. Treasury has guaranteed that
it will repay at least the face value of an IIS issued by the U.S.
government.
Inflation measurement and adjustment for an IIS have two important features.
There is a two-month lag between the time that inflation occurs in the
economy and when it is factored into IIS valuations. This is due to the time
required to measure and calculate the CPI and for the Treasury to adjust the
inflation accrual schedules for an IIS. For example, inflation that occurs in
January is calculated and announced during February and affects IIS
valuations throughout the month of March. In addition, the inflation index
used is the non-seasonally adjusted index. It differs from the CPI that is
reported by most news organizations, which is statistically smoothed to
overcome highs and lows observed at different points each year. The use of
the non-seasonally adjusted index can cause the Fund's income level to
fluctuate.
[FLAG]
The Fund is subject to income fluctuations. The Fund's quarterly income
distributions are likely to fluctuate considerably more than the income
distributions of a typical bond fund. Income fluctuations associated with
CHANGES IN INTEREST RATES are expected to be low; however, income fluctuations
resulting from CHANGES IN INFLATION are expected to be high. Overall, investors
can expect income fluctuations to be high for the Fund.
While fluctuations in quarterly income distributions are expected to be high,
distributions should, over the long term, provide an income yield that exceeds
inflation. That said, in periods of extreme deflation, the Fund may have no
income at all to distribute.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
The Fund is subject to interest rate risk, which is the chance that bond prices
overall will decline because of rising interest rates. Interest rate risk
should be moderate for the Fund.
6
PLAIN TALK ABOUT REAL RETURNS
Inflation-indexed securities are designed to provide a "real rate of
return"--a return after adjusting for the impact of inflation. Inflation--a
rise in the general price level--erodes the purchasing power of an investor's
portfolio. For example, if an investment provides a "nominal" total return of
5% in a given year and inflation is 2% during that period, the
inflation-adjusted, or real, return is 3%. Inflation, as measured by the CPI,
has occurred in each of the past 50 years, so investors should be conscious
of both the nominal and the real returns on their investments. Investors in
inflation-indexed bond funds who do not reinvest the portion of the income
distribution that comes from inflation adjustments will not maintain the
purchasing power of the investment over the long term. This is because
interest earned depends on the amount of principal invested, and that
principal won't grow with inflation if the investor does not reinvest the
principal adjustment paid out as part of a fund's income distributions.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND INTEREST RATES
Interest rates on conventional bonds have two primary components: a "real"
yield and an increment that reflects investor expectations of future
inflation. By contrast, interest rates on an IIS are adjusted for inflation
and, therefore, aren't affected meaningfully by inflation expectations. This
leaves only real rates to influence the price of an IIS. A rise in real rates
will cause the price of an IIS to fall, while a decline in real rates will
boost the price of an IIS.
[FLAG]
The Fund is subject, to a limited extent, to credit risk, which is the chance
that a bond issuer will fail to pay interest and principal in a timely manner,
or that negative perceptions of the issuer's ability to make such payments will
cause the price of that bond to decline.
The credit quality of the Fund depends on the quality of its investments.
Because the Fund emphasizes securities backed by the full faith and credit of
the U.S. government, the average credit quality of the Fund's holdings is
expected to be high and, consequently, credit risk should be low for the Fund.
As of December 31, 2007, the dollar-weighted average credit quality of the
Fund's holdings, as rated by Moody's Investors Service, Inc., was Aaa. At a
minimum, all bonds purchased by the Fund will be rated investment-grade (in one
of the four highest rating categories) or will be unrated bonds considered by
the advisor to be investment-grade.
7
PLAIN TALK ABOUT CREDIT QUALITY
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND TAXES
Any increase in principal for an IIS resulting from inflation adjustments is
considered by the IRS to be taxable income in the year it occurs. For direct
holders of an IIS, this means that taxes must be paid on principal
adjustments even though these amounts are not received until the bond
matures. By contrast, a mutual fund holding IISs pays out (to shareholders)
both interest income and the income attributable to principal adjustments
each quarter in the form of cash or reinvested shares, and the shareholders
must pay taxes on the distributions.
SECURITY SELECTION
The Fund emphasizes inflation-indexed bonds issued by the U.S. government,
although it may also purchase inflation-indexed bonds issued by agencies and
instrumentalities of the U.S. government and by corporations. The Fund may
invest in bonds of any maturity, but is expected to maintain a dollar-weighted
average maturity in the range of 7 to 20 years.
The Vanguard Group (Vanguard), advisor to the Fund, buys and sells securities
based on its judgment about issuers, the prices of the securities, and other
economic factors. While the advisor uses the Lehman Brothers U.S. Treasury
Inflation Notes Index as a benchmark for the Fund's performance, the Fund's
average maturity and mix of bonds may differ from those of the index. This may
occur, for example, when the advisor sees an opportunity to enhance returns.
8
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
OTHER INVESTMENT POLICIES AND RISKS
Up to 20% of the Fund's assets may be invested in holdings that are not
inflation-indexed. The Fund typically will make such investments when
inflation-indexed bonds are less attractive. The Fund's non-inflation-indexed
holdings may include the following:
- Corporate debt obligations--usually called bonds--represent loans by an
investor to a corporation.
- U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
- Cash investments is a blanket term that describes a variety of short-term
fixed income investments, including money market instruments, commercial paper,
bank certificates of deposit, banker's acceptances, and repurchase agreements.
Repurchase agreements represent short-term (normally overnight) loans by the
Fund to commercial banks or large securities dealers.
- Illiquid securities are securities that the Fund may not be able to sell in
the ordinary course of business. The Fund may invest up to 15% of its net assets
in these securities. Restricted securities are a special type of illiquid
security; these securities have not been publicly issued and legally can be
resold only to qualified buyers. From time to time, the board of trustees may
determine that particular restricted securities are not illiquid, and those
securities may then be purchased by the Fund without limit.
- Mortgage dollar rolls are transactions in which the Fund sells mortgage-backed
securities to a dealer and simultaneously agrees to purchase similar securities
in the future at a predetermined price. These transactions simulate an
investment in mortgage-backed securities and have the potential to enhance the
Fund's returns and reduce its administrative burdens, compared with holding
mortgage-backed securities directly. These transactions may increase the Fund's
portfolio turnover rate. Mortgage dollar rolls will be used only if consistent
with the Fund's investment objective and risk profile.
9
[FLAG]
The Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Fund
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
- Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
- Add value when these instruments are attractively priced; or
- Adjust sensitivity to changes in interest rates.
The Fund's derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
10
CASH MANAGEMENT
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
TEMPORARY INVESTMENT MEASURES
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
FREQUENT TRADING OR MARKET-TIMING
BACKGROUND. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
POLICIES TO ADDRESS FREQUENT TRADING. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent
11
frequent trading or market-timing in all circumstances, the following policies
have been adopted to address these issues:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
- Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the INVESTING WITH
VANGUARD section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
- Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the Share Price
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for intermediate government funds was approximately 247%, as reported by
Morningstar, Inc., on December 31, 2007.
12
PLAIN TALK ABOUT TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markups and other transaction costs will have on its return.
Also, funds with high turnover rates may be more likely to generate capital
gains that must be distributed to shareholders as taxable income.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
13
INVESTMENT ADVISOR
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began
operations in 1975, serves as advisor to the Fund through its Fixed Income
Group. As of December 31, 2007, Vanguard served as advisor for approximately $1
trillion in assets. Vanguard manages the Fund on an at-cost basis, subject to
the supervision and oversight of the trustees and officers of the Fund.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended July 31, 2007 (or June 30, 2008).
GEORGE U. SAUTER is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
ROBERT F. AUWAERTER is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
14
PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS
The managers primarily responsible for the day-to-day management of the Fund
are:
JOHN W. HOLLYER, CFA, Principal of Vanguard. He has managed investment
portfolios since joining Vanguard in 1989 and has co-managed the Fund since
its inception. Education: B.S., University of Pennsylvania.
KENNETH E. VOLPERT, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; and has co-managed the Fund since its inception.
Education: B.S., University of Illinois; M.B.A., University of Chicago.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. Income dividends generally are distributed quarterly in March, June,
September, and December; capital gains distributions generally occur annually in
December. In addition, the Fund may occasionally be required to make
supplemental distributions at some other time during the year.
Your distributions will be reinvested in additional Fund shares and accumulate
on a tax-deferred basis if you are investing through an employer-sponsored
retirement or savings plan. You will not owe taxes on these distributions until
you begin withdrawals from the plan. You should consult your plan administrator,
your plan's Summary Plan Description, or your tax advisor about the tax
consequences of plan withdrawals.
15
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
16
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Investor Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
17
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Investor Shares began the fiscal year ended December 31, 2007, with a net
asset value (price) of $11.80 per share. During the year, each Investor Share
earned $0.651 from investment income (interest) and $0.646 from investments
that had appreciated in value or that were sold for higher prices than the
Fund paid for them.
Shareholders received $0.647 per share in the form of dividend distributions.
There was no return of capital. A portion of each year's distributions may
come from the prior year's income or capital gains.
The share price at the end of the year was $12.45, reflecting earnings of
$1.297 per share and distributions of $0.647 per share. This was an increase
of $0.65 per share (from $11.80 at the beginning of the year to $12.45 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 11.40% for the year.
As of December 31, 2007, the Investor Shares had approximately $6.7 billion
in net assets. For the year, the annualized expense ratio was 0.20% ($2.00
per $1,000 of net assets), and the annualized net investment income amounted
to 5.92% of average net assets. The Fund sold and replaced securities valued
at an annualized rate of 21% of its net assets.
18
INFLATION-PROTECTED SECURITIES FUND INVESTOR SHARES
Feb. 1,
2007 to Year Ended January 31,
Dec. 31, -----------------------------------------------------
2007/1/ 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.80 $12.18 $12.57 $12.36 $11.91 $10.68
--------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
--------------------------------------------------------------------------------------------------------
Net Investment Income .651 .483 .573 .596 .41 .47
--------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .646 (.437) (.230) .244 .61 1.28
--------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.297 .046 .343 .840 1.02 1.75
--------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
--------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.647) (.407) (.681) (.565) (.45) (.46)
--------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.052) (.065) (.12) (.06)
--------------------------------------------------------------------------------------------------------
Return of Capital -- (.019) -- -- -- --
--------------------------------------------------------------------------------------------------------
Total Distributions (.647) (.426) (.733) (.630) (.57) (.52)
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.45 $11.80 $12.18 $12.57 $12.36 $11.91
========================================================================================================
TOTAL RETURN 11.40% 0.43% 2.76% 6.96% 8.69% 16.64%
========================================================================================================
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $6,662 $5,361 $6,227 $7,530 $5,164 $3,143
--------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.20%/2/ 0.20% 0.20% 0.17% 0.18% 0.22%
--------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.92%/2/ 3.87% 4.83% 4.83% 3.46% 4.55%
--------------------------------------------------------------------------------------------------------
Turnover Rate 21% 53% 47% 73% 63% 108%
========================================================================================================
1 The Fund's fiscal year-end changed from January 31 to December 31, effective December 31, 2007.
2 Annualized.
|
19
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 800-523-1188.
- If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
- Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
- Vanguard reserves the right to change these policies without prior notice
to shareholders.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV after Vanguard receives the order from your plan
administrator). As long as this request is received before the close of trading
on the New York Stock Exchange (generally 4 p.m., Eastern time), you will
receive that day's NAV. This is known as your trade date.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
20
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
- You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
- Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
- Purchases of shares with participant payroll or employer contributions or
loan repayments.
- Purchases of shares with reinvested dividend or capital gains distributions.
- Distributions, loans, and in-service withdrawals from a plan.
- Redemptions of shares as part of a plan termination or at the direction of the
plan.
- Redemptions of shares to pay fund or account fees.
- Share or asset transfers or rollovers.
- Re-registrations of shares within the same fund.
- Conversions of shares from one share class to another in the same fund.
- Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
PLANS FOR WHICH VANGUARD DOES NOT SERVE AS RECORDKEEPER: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
21
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
PORTFOLIO HOLDINGs
We generally post on our website at www.vanguard.com, in the HOLDINGS section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. These postings generally remain
until replaced by new postings as previously described. Please consult the
Fund's Statement of Additional Information or our website for a description of
the policies and procedures that govern disclosure of the Fund's portfolio
holdings.
22
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark owned by CFA
Institute. All other marks are the exclusive property of their respective
owners.
23
GLOSSARY OF INVESTMENT TERMS
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity and are repaid. In general, the longer the average maturity, the more a
fund's share price fluctuates in response to changes in market interest rates.
In calculating average maturity, a fund uses a bond's maturity or, if
applicable, an earlier date on which the advisor believes it is likely that a
maturity-shortening device (such as a call, put, refunding, prepayment or
redemption provision, or an adjustable coupon) will cause the bond to be repaid.
BOND. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
CAPITAL GAINS DISTRIBUTION. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
CASH INVESTMENTS. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
COUPON. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
DIVIDEND DISTRIBUTION. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
FACE VALUE. The amount to be paid at a bond's maturity; also known as the par
value or principal.
FIXED INCOME SECURITY. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
INCEPTION DATE. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
INFLATION-INDEXED SECURITIES. Bonds issued by the U.S. government, government
agencies, or corporations, whose principal and interest payments--unlike those
of conventional bonds--are adjusted over time to reflect inflation.
24
INVESTMENT-GRADE BOND. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
MATURITY. The date when a bond issuer agrees to repay the bond's principal, or
face value, to the bond's buyer.
NET ASSET VALUE (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
PRINCIPAL. The face value of a debt instrument or the amount of money put into
an investment.
RETURN OF CAPITAL. A return of all or part of your original investment in the
Fund. In general, return of capital reduces your cost basis in a Fund's shares
and is not taxable to you, but return of capital after your cost basis has been
reduced to zero is taxable as capital gains.
SECURITIES. Stocks, bonds, money market instruments, and other investment
vehicles.
TOTAL RETURN. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
VOLATILITY. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
YIELD. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
FOR MORE INFORMATION
If you would like more information about Vanguard Inflation-Protected Securities
Fund, the following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I119 042008
VANGUARD/(R)/ INFLATION-PROTECTED
SECURITIES FUND
> PROSPECTUS
ADMIRAL(TM) SHARES FOR PARTICIPANTS
April 25, 2008
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
This prospectus contains financial data for the Fund through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
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Fund Profile 1 Financial Highlights 17
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More on the Fund 5 Investing With Vanguard 20
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The Fund and Vanguard 13 Accessing Fund Information by Computer 23
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Investment Advisor 14 Glossary of Investment Terms 24
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Dividends, Capital Gains, and Taxes 15
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Share Price 16
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|
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Fund's Admiral Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 800-662-7447.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE COMPANY OR ANY OTHER GOVERNMENT
AGENCY.
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide inflation protection and income consistent with
investment in inflation-indexed securities.
PRIMARY INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in inflation-indexed bonds issued by
the U.S. government, its agencies and instrumentalities, and corporations. The
Fund may invest in bonds of any maturity; however, its dollar-weighted average
maturity is expected to be in the range of 7 to 20 years. At a minimum, all
bonds purchased by the Fund will be rated "investment-grade." For additional
information on the Fund's investment strategies, please see MORE ON THE FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Income fluctuations. The Fund's quarterly income distributions are likely to
fluctuate considerably more than the income distributions of a typical bond
fund. Income fluctuations associated with changes in interest rates are expected
to be low; however, income fluctuations associated with changes in inflation are
expected to be high. Overall, investors can expect income fluctuations to be
high for the Fund.
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk is expected to be moderate
for the Fund.
- Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of a relevant market index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
1
ANNUAL TOTAL RETURNS--ADMIRAL SHARES
[Bar Chart Range: -20% to 30%]
2006 0.52
2007 11.69
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 5.04% (quarter ended December 31, 2007), and the lowest return for a
quarter was -2.07% (quarter ended March 31, 2006).
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2007
Since
1 Year Inception/1/
------------------------------------------------------------------------------------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND ADMIRAL SHARES 11.69% 4.99%
------------------------------------------------------------------------------------------
LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX
(reflects no deduction for fees or expenses) 11.63% 4.97%
------------------------------------------------------------------------------------------
1 Since-inception returns are from June 10, 2005--the inception date of the Admiral
Shares--through December 31, 2007.
|
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
2
SHAREHOLDER FEES
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
|
ANNUAL FUND OPERATING EXPENSES
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.07%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.11%
-------------------------------------------------------------------------
|
The following example is intended to help you compare the cost of investing in
the Fund's Admiral Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$11 $35 $62 $141
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
3
PLAIN TALK ABOUT FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets
of the fund. Vanguard Inflation-Protected Securities Fund Admiral Shares'
expense ratio in fiscal year 2007 was 0.11%, or $1.10 per $1,000 of average
net assets. The average treasury inflation-protected security fund had
expenses in 2007 of 0.90%, or $9.00 per $1,000 of average net assets (derived
from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
PLAIN TALK ABOUT COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
ADDITIONAL INFORMATION
As of December 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $12.4 billion
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are distributed quarterly in March, June,
September, and December; capital gains, if any, are
distributed annually in December
-----------------------------------------------------------------------------------------------
Inception Date Investor Shares--June 29, 2000
Admiral Shares--June 10, 2005
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation InfProAd
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 5119
-----------------------------------------------------------------------------------------------
CUSIP Number 922031737
-----------------------------------------------------------------------------------------------
Ticker Symbol VAIPX
-----------------------------------------------------------------------------------------------
|
4
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Note that the Fund's
investment objective is not fundamental and may be changed without a shareholder
vote. However, the Fund's policy of investing at least 80% of its assets in
inflation-indexed bonds may be changed only upon 60 days' notice to
shareholders.
MARKET EXPOSURE
The Fund invests mainly in a diversified group of investment-grade,
inflation-indexed bonds. As a result of this investment strategy, the Fund is
subject to certain risks.
5
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES
Unlike a conventional bond, whose issuer makes regular fixed interest
payments and repays the face value of the bond at maturity, an
inflation-indexed security (IIS) provides principal and interest payments
that are adjusted over time to reflect a rise (inflation) or a drop
(deflation) in the general price level for goods and services. This
adjustment is a key feature, given that the Consumer Price Index (CPI) has
risen in each of the past 50 years. (Source: Bureau of Labor Statistics.)
Importantly, in the event of deflation, the U.S. Treasury has guaranteed that
it will repay at least the face value of an IIS issued by the U.S.
government.
Inflation measurement and adjustment for an IIS have two important features.
There is a two-month lag between the time that inflation occurs in the
economy and when it is factored into IIS valuations. This is due to the time
required to measure and calculate the CPI and for the Treasury to adjust the
inflation accrual schedules for an IIS. For example, inflation that occurs in
January is calculated and announced during February and affects IIS
valuations throughout the month of March. In addition, the inflation index
used is the non-seasonally adjusted index. It differs from the CPI that is
reported by most news organizations, which is statistically smoothed to
overcome highs and lows observed at different points each year. The use of
the non-seasonally adjusted index can cause the Fund's income level to
fluctuate.
[FLAG]
The Fund is subject to income fluctuations. The Fund's quarterly income
distributions are likely to fluctuate considerably more than the income
distributions of a typical bond fund. Income fluctuations associated with
CHANGES IN INTEREST RATES are expected to be low; however, income fluctuations
resulting from CHANGES IN INFLATION are expected to be high. Overall, investors
can expect income fluctuations to be high for the Fund.
While fluctuations in quarterly income distributions are expected to be high,
distributions should, over the long term, provide an income yield that exceeds
inflation. That said, in periods of extreme deflation, the Fund may have no
income at all to distribute.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
The Fund is subject to interest rate risk, which is the chance that bond prices
overall will decline because of rising interest rates. Interest rate risk
should be moderate for the Fund.
6
PLAIN TALK ABOUT REAL RETURNS
Inflation-indexed securities are designed to provide a "real rate of
return"--a return after adjusting for the impact of inflation. Inflation--a
rise in the general price level--erodes the purchasing power of an investor's
portfolio. For example, if an investment provides a "nominal" total return of
5% in a given year and inflation is 2% during that period, the
inflation-adjusted, or real, return is 3%. Inflation, as measured by the CPI,
has occurred in each of the past 50 years, so investors should be conscious
of both the nominal and the real returns on their investments. Investors in
inflation-indexed bond funds who do not reinvest the portion of the income
distribution that comes from inflation adjustments will not maintain the
purchasing power of the investment over the long term. This is because
interest earned depends on the amount of principal invested, and that
principal won't grow with inflation if the investor does not reinvest the
principal adjustment paid out as part of a fund's income distributions.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND INTEREST RATES
Interest rates on conventional bonds have two primary components: a "real"
yield and an increment that reflects investor expectations of future
inflation. By contrast, interest rates on an IIS are adjusted for inflation
and, therefore, aren't affected meaningfully by inflation expectations. This
leaves only real rates to influence the price of an IIS. A rise in real rates
will cause the price of an IIS to fall, while a decline in real rates will
boost the price of an IIS.
[FLAG]
The Fund is subject, to a limited extent, to credit risk, which is the chance
that a bond issuer will fail to pay interest and principal in a timely manner,
or that negative perceptions of the issuer's ability to make such payments will
cause the price of that bond to decline.
The credit quality of the Fund depends on the quality of its investments.
Because the Fund emphasizes securities backed by the full faith and credit of
the U.S. government, the average credit quality of the Fund's holdings is
expected to be high and, consequently, credit risk should be low for the Fund.
As of December 31, 2007, the dollar-weighted average credit quality of the
Fund's holdings, as rated by Moody's Investors Service, Inc., was Aaa. At a
minimum, all bonds purchased by the Fund will be rated investment-grade (in one
of the four highest rating categories) or will be unrated bonds considered by
the advisor to be investment-grade.
7
PLAIN TALK ABOUT CREDIT QUALITY
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND TAXES
Any increase in principal for an IIS resulting from inflation adjustments is
considered by the IRS to be taxable income in the year it occurs. For direct
holders of an IIS, this means that taxes must be paid on principal
adjustments even though these amounts are not received until the bond
matures. By contrast, a mutual fund holding IISs pays out (to shareholders)
both interest income and the income attributable to principal adjustments
each quarter in the form of cash or reinvested shares, and the shareholders
must pay taxes on the distributions.
SECURITY SELECTION
The Fund emphasizes inflation-indexed bonds issued by the U.S. government,
although it may also purchase inflation-indexed bonds issued by agencies and
instrumentalities of the U.S. government and by corporations. The Fund may
invest in bonds of any maturity, but is expected to maintain a dollar-weighted
average maturity in the range of 7 to 20 years.
The Vanguard Group (Vanguard), advisor to the Fund, buys and sells securities
based on its judgment about issuers, the prices of the securities, and other
economic factors. While the advisor uses the Lehman Brothers U.S. Treasury
Inflation Notes Index as a benchmark for the Fund's performance, the Fund's
average maturity and mix of bonds may differ from those of the index. This may
occur, for example, when the advisor sees an opportunity to enhance returns.
8
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
OTHER INVESTMENT POLICIES AND RISKS
Up to 20% of the Fund's assets may be invested in holdings that are not
inflation-indexed. The Fund typically will make such investments when
inflation-indexed bonds are less attractive. The Fund's non-inflation-indexed
holdings may include the following:
- Corporate debt obligations--usually called bonds--represent loans by an
investor to a corporation.
- U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
- Cash investments is a blanket term that describes a variety of short-term
fixed income investments, including money market instruments, commercial paper,
bank certificates of deposit, banker's acceptances, and repurchase agreements.
Repurchase agreements represent short-term (normally overnight) loans by the
Fund to commercial banks or large securities dealers.
- Illiquid securities are securities that the Fund may not be able to sell in
the ordinary course of business. The Fund may invest up to 15% of its net assets
in these securities. Restricted securities are a special type of illiquid
security; these securities have not been publicly issued and legally can be
resold only to qualified buyers. From time to time, the board of trustees may
determine that particular restricted securities are not illiquid, and those
securities may then be purchased by the Fund without limit.
- Mortgage dollar rolls are transactions in which the Fund sells mortgage-backed
securities to a dealer and simultaneously agrees to purchase similar securities
in the future at a predetermined price. These transactions simulate an
investment in mortgage-backed securities and have the potential to enhance the
Fund's returns and reduce its administrative burdens, compared with holding
mortgage-backed securities directly. These transactions may increase the Fund's
portfolio turnover rate. Mortgage dollar rolls will be used only if consistent
with the Fund's investment objective and risk profile.
9
[FLAG]
The Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Fund
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
- Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
- Add value when these instruments are attractively priced; or
- Adjust sensitivity to changes in interest rates.
The Fund's derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
10
CASH MANAGEMENT
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
TEMPORARY INVESTMENT MEASURES
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
FREQUENT TRADING OR MARKET-TIMING
BACKGROUND. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
POLICIES TO ADDRESS FREQUENT TRADING. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent
11
frequent trading or market-timing in all circumstances, the following policies
have been adopted to address these issues:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
- Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the INVESTING WITH
VANGUARD section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
- Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the SHARE PRICE
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for intermediate government funds was approximately 247%, as reported by
Morningstar, Inc., on December 31, 2007.
12
PLAIN TALK ABOUT TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markup and other transaction costs will have on its return. Also,
funds with high turnover rates may be more likely to generate capital gains
that must be distributed to shareholders as taxable income.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
13
INVESTMENT ADVISOR
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began
operations in 1975, serves as advisor to the Fund through its Fixed Income
Group. As of December 31, 2007, Vanguard served as advisor for approximately $1
trillion in assets. Vanguard manages the Fund on an at-cost basis, subject to
the supervision and oversight of the trustees and officers of the Fund.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended July 31, 2007 (or June 30, 2008).
GEORGE U. SAUTER is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
ROBERT F. AUWAERTER is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
14
PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS
The managers primarily responsible for the day-to-day management of the Fund
are:
JOHN W. HOLLYER, CFA, Principal of Vanguard. He has managed investment
portfolios since joining Vanguard in 1989 and has co-managed the Fund since
its inception. Education: B.S., University of Pennsylvania.
KENNETH E. VOLPERT, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; and has co-managed the Fund since its inception.
Education: B.S., University of Illinois; M.B.A., University of Chicago.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. Income dividends generally are distributed quarterly in March, June,
September, and December; capital gains distributions generally occur annually in
December. In addition, the Fund may occasionally be required to make
supplemental distributions at some other time during the year.
Your distributions will be reinvested in additional Fund shares and accumulate
on a tax-deferred basis if you are investing through an employer-sponsored
retirement or savings plan. You will not owe taxes on these distributions until
you begin withdrawals from the plan. You should consult your plan administrator,
your plan's Summary Plan Description, or your tax advisor about the tax
consequences of plan withdrawals.
15
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
16
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Admiral Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Admiral Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Admiral Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
17
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Admiral Shares began the fiscal year ended December 31, 2007, with a net
asset value (price) of $23.17 per share. During the year, each Admiral Share
earned $1.299 from investment income (interest) and $1.278 from investments
that had appreciated in value or that were sold for higher prices than the
Fund paid for them.
Shareholders received $1.297 per share in the form of dividend distributions.
There was no return of capital. A portion of each year's distributions may
come from the prior year's income or capital gains.
The share price at the end of the year was $24.45, reflecting earnings of
$2.577 per share and distributions of $1.297 per share. This was an increase
of $1.28 per share (from $23.17 at the beginning of the year to $24.45 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 11.54% for the year.
As of December 31, 2007, the Admiral Shares had approximately $3.5 billion in
net assets. For the year, the annualized expense ratio was 0.11% ($1.10 per
$1,000 of net assets), and the annualized net investment income amounted to
6.01% of average net assets. The Fund sold and replaced securities valued at
an annualized rate of 21% of its net assets.
18
INFLATION-PROTECTED SECURITIES FUND ADMIRAL SHARES
Feb. 1, Year June 10,
2007 to Ended 2005/2/ to
Dec. 31, Jan. 31, Jan. 31,
2007/1/ 2007 2006
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $23.17 $23.91 $25.00
--------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
--------------------------------------------------------------------------------------------------------
Net Investment Income 1.299 .971 .683
--------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 1.278 (.858) (.432)
--------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.577 .113 .251
--------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
--------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (1.297) (.815) (1.315)
--------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.026)
--------------------------------------------------------------------------------------------------------
Return of Capital -- (.038) --
--------------------------------------------------------------------------------------------------------
Total Distributions (1.297) (.853) (1.341)
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $24.45 $23.17 $23.91
========================================================================================================
TOTAL RETURN 11.54% 0.53% 1.02%
========================================================================================================
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $3,487 $2,523 $2,474
--------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11%/3/ 0.11% 0.11%/3/
--------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 6.01%/3/ 3.96% 4.92%/3/
--------------------------------------------------------------------------------------------------------
Turnover Rate 21% 53% 47%
========================================================================================================
1 The Fund's fiscal year-end changed from January 31 to December 31, effective December 31, 2007.
2 Inception.
3 Annualized.
|
19
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 800-523-1188.
- If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
- Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
- Vanguard reserves the right to change these policies without prior notice
to shareholders.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV after Vanguard receives the order from your plan
administrator). As long as this request is received before the close of trading
on the New York Stock Exchange (generally 4 p.m., Eastern time), you will
receive that day's NAV. This is known as your trade date.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
20
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
- You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
- Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
- Purchases of shares with participant payroll or employer contributions or
loan repayments.
- Purchases of shares with reinvested dividend or capital gains distributions.
- Distributions, loans, and in-service withdrawals from a plan.
- Redemptions of shares as part of a plan termination or at the direction of the
plan.
- Redemptions of shares to pay fund or account fees.
- Share or asset transfers or rollovers.
- Re-registrations of shares within the same fund.
- Conversions of shares from one share class to another in the same fund.
- Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
PLANS FOR WHICH VANGUARD DOES NOT SERVE AS RECORDKEEPER: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
21
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
PORTFOLIO HOLDINGS
We generally post on our website at www.vanguard.com, in the HOLDINGS section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. These postings generally remain
until replaced by new postings as previously described. Please consult the
Fund's Statement of Additional Information or our website for a description of
the policies and procedures that govern disclosure of the Fund's portfolio
holdings.
22
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Admiral, Vanguard ETF, and the ship
logo are trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark owned by
CFA Institute. All other marks are the exclusive property of their respective
owners.
23
GLOSSARY OF INVESTMENT TERMS
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity and are repaid. In general, the longer the average maturity, the more a
fund's share price fluctuates in response to changes in market interest rates.
In calculating average maturity, a fund uses a bond's maturity or, if
applicable, an earlier date on which the advisor believes it is likely that a
maturity-shortening device (such as a call, put, refunding, prepayment or
redemption provision, or an adjustable coupon) will cause the bond to be repaid.
BOND. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
CAPITAL GAINS DISTRIBUTION. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
CASH INVESTMENTS. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
COUPON. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
DIVIDEND DISTRIBUTION. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
FACE VALUE. The amount to be paid at a bond's maturity; also known as the par
value or principal.
FIXED INCOME SECURITY. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
INCEPTION DATE. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
INFLATION-INDEXED SECURITIES. Bonds issued by the U.S. government, government
agencies, or corporations, whose principal and interest payments--unlike those
of conventional bonds--are adjusted over time to reflect inflation.
24
INVESTMENT-GRADE BOND. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
MATURITY. The date when a bond issuer agrees to repay the bond's principal, or
face value, to the bond's buyer.
NET ASSET VALUE (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
PRINCIPAL. The face value of a debt instrument or the amount of money put into
an investment.
RETURN OF CAPITAL. A return of all or part of your original investment in the
Fund. In general, return of capital reduces your cost basis in a Fund's shares
and is not taxable to you, but return of capital after your cost basis has been
reduced to zero is taxable as capital gains.
SECURITIES. Stocks, bonds, money market instruments, and other investment
vehicles.
TOTAL RETURN. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
VOLATILITY. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
YIELD. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
FOR MORE INFORMATION
If you would like more information about Vanguard Inflation-Protected Securities
Fund, the following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I5119 042008
VANGUARD/(R)/ INFLATION-PROTECTED
SECURITIES FUND
> PROSPECTUS
INSTITUTIONAL SHARES
April 25, 2008
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
This prospectus contains financial data for the Fund through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
------------------------------------------------------------------------------------
Fund Profile 1 Investing With Vanguard 22
------------------------------------------------------------------------------------
More on the Fund 6 Purchasing Shares 22
------------------------------------------------------------------------------------
The Fund and Vanguard 14 Converting Shares 25
------------------------------------------------------------------------------------
Investment Advisor 14 Redeeming Shares 26
------------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes 15 Exchanging Shares 29
------------------------------------------------------------------------------------
Share Price 18 Frequent-Trading Limits 30
------------------------------------------------------------------------------------
Financial Highlights 19 Other Rules You Should Know 31
------------------------------------------------------------------------------------
Fund and Account Updates 35
------------------------------------------------------------------------------------
Contacting Vanguard 37
------------------------------------------------------------------------------------
Glossary of Investment Terms 39
------------------------------------------------------------------------------------
|
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
SHARE CLASS OVERVIEW
This prospectus offers the Fund's Institutional Shares, which are generally for
investors who do not require special employee benefit plan services and who
invest a minimum of $5 million. A separate prospectus offers the Fund's Investor
Shares and Admiral/TM/ Shares, which have investment minimums of $3,000 and
$100,000, respectively.
The Fund's separate share classes have different expenses; as a result, their
investment performances will vary.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE COMPANY OR ANY OTHER GOVERNMENT
AGENCY.
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide inflation protection and income consistent with
investment in inflation-indexed securities.
PRIMARY INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in inflation-indexed bonds issued by
the U.S. government, its agencies and instrumentalities, and corporations. The
Fund may invest in bonds of any maturity; however, its dollar-weighted average
maturity is expected to be in the range of 7 to 20 years. At a minimum, all
bonds purchased by the Fund will be rated "investment-grade." For additional
information on the Fund's investment strategies, please see MORE ON THE FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Income fluctuations. The Fund's quarterly income distributions are likely to
fluctuate considerably more than the income distributions of a typical bond
fund. Income fluctuations associated with changes in interest rates are expected
to be low; however, income fluctuations associated with changes in inflation are
expected to be high. Overall, investors can expect income fluctuations to be
high for the Fund.
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk is expected to be moderate
for the Fund.
- Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Institutional Shares has varied from one calendar year to another over the
periods shown. The table shows how the average annual total returns of the
Institutional Shares compare with those of a relevant market index. Keep in mind
that the Fund's past performance (before and after taxes) does not indicate how
the Fund will perform in the future.
1
ANNUAL TOTAL RETURN--INSTITUTIONAL SHARES
[Bar Chart Range: -20% to 30%]
2004 8.25
2005 2.78
2006 0.46
2007 11.82
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 5.04% (quarter ended December 31, 2007), and the lowest return for a
quarter was -2.95% (June 30, 2004).
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2007
Since
1 Year Inception/1/
------------------------------------------------------------------------------------------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND INSTITUTIONAL SHARES
------------------------------------------------------------------------------------------------
Return Before Taxes 11.82% 5.58%
------------------------------------------------------------------------------------------------
Return After Taxes on Distributions 9.66 3.64
------------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 7.58 3.63
------------------------------------------------------------------------------------------------
LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX
(reflects no deduction for fees, expenses, or taxes) 11.63% 5.60%
------------------------------------------------------------------------------------------------
1 Since-inception returns are from December 12, 2003--the inception date of the Institutional
Shares--through December 31, 2007.
|
NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
for each share class in an amount approximately equal to the difference in
expense ratios. After-tax returns are not relevant for a shareholder who holds
fund shares in a tax-deferred account, such as an individual retirement account
or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions
and Sale of Fund Shares will be higher than other figures for the same period if
a capital loss occurs upon redemption and results in an assumed tax deduction
for the shareholder.
2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
SHAREHOLDER FEES
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None/1/
-------------------------------------------------------------------------
|
ANNUAL FUND OPERATING EXPENSES
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.04%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.08%
-------------------------------------------------------------------------
1 A $5 fee applies to wire redemptions under $5,000.
|
The following example is intended to help you compare the cost of investing in
the Fund's Institutional Shares with the cost of investing in other mutual
funds. It illustrates the hypothetical expenses that you would incur over
various periods if you invest $10,000 in the Fund's shares. This example assumes
that the Shares provide a return of 5% a year and that operating expenses remain
the same. The results apply whether or not you redeem your investment at the end
of the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$8 $26 $45 $103
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
3
PLAIN TALK ABOUT FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets
of the fund. Vanguard Inflation-Protected Securities Fund Institutional
Shares' expense ratio in fiscal year 2007 was 0.08%, or $0.80 per $1,000 of
average net assets. The average Treasury inflation-protected securities fund
had expenses in 2007 of 0.90%, or $9.00 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
PLAIN TALK ABOUT COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
4
ADDITIONAL INFORMATION
As of December 31, 2007
--------------------------------------------------------------------------------------------
Net Assets $12.4 billion
--------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
--------------------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are distributed quarterly in March, June,
September, and December; capital gains, if any, are
distributed annually in December.
--------------------------------------------------------------------------------------------
Inception Date Investor Shares--June 29, 2000
Institutional Shares--December 12, 2003
--------------------------------------------------------------------------------------------
Suitable for IRAs Yes
--------------------------------------------------------------------------------------------
Minimum Initial Investment $5 million
--------------------------------------------------------------------------------------------
Newspaper Abbreviation InPrSeln
--------------------------------------------------------------------------------------------
Vanguard Fund Number 1190
--------------------------------------------------------------------------------------------
CUSIP Number 922031745
--------------------------------------------------------------------------------------------
Ticker Symbol VIPIX
--------------------------------------------------------------------------------------------
|
5
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Note that the Fund's
investment objective is not fundamental and may be changed without a shareholder
vote. However, the Fund's policy of investing at least 80% of its assets in
inflation-indexed bonds may be changed upon 60 days' notice to shareholders.
MARKET EXPOSURE
The Fund invests mainly in a diversified group of investment-grade,
inflation-indexed bonds. As a result of this investment strategy, the Fund is
subject to certain risks.
6
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES
Unlike a conventional bond, whose issuer makes regular fixed interest
payments and repays the face value of the bond at maturity, an
inflation-indexed security (IIS) provides principal and interest payments
that are adjusted over time to reflect a rise (inflation) or a drop
(deflation) in the general price level for goods and services. This
adjustment is a key feature, given that the Consumer Price Index (CPI) has
risen in each of the past 50 years. (Source: Bureau of Labor Statistics.)
Importantly, in the event of deflation, the U.S. Treasury has guaranteed that
it will repay at least the face value of an IIS issued by the U.S.
government.
Inflation measurement and adjustment for an IIS have two important features.
There is a two-month lag between the time that inflation occurs in the
economy and when it is factored into IIS valuations. This is due to the time
required to measure and calculate the CPI and for the Treasury to adjust the
inflation accrual schedules for an IIS. For example, inflation that occurs in
January is calculated and announced during February and affects IIS
valuations throughout the month of March. In addition, the inflation index
used is the non-seasonally adjusted index. It differs from the CPI that is
reported by most news organizations, which is statistically smoothed to
overcome highs and lows observed at different points each year. The use of
the non-seasonally adjusted index can cause the Fund's income level to
fluctuate.
[FLAG]
The Fund is subject to income fluctuations. The Fund's quarterly income
distributions are likely to fluctuate considerably more than the income
distributions of a typical bond fund. Income fluctuations associated with
CHANGES IN INTEREST RATES are expected to be low; however, income fluctuations
resulting from CHANGES IN INFLATION are expected to be high. Overall, investors
can expect income fluctuations to be high for the Fund.
While fluctuations in quarterly income distributions are expected to be high,
distributions should, over the long term, provide an income yield that exceeds
inflation. That said, in periods of extreme deflation, the Fund may have no
income at all to distribute.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
The Fund is subject to interest rate risk, which is the chance that bond prices
overall will decline because of rising interest rates. Interest rate risk
should be moderate for the Fund.
7
PLAIN TALK ABOUT REAL RETURNS
Inflation-indexed securities are designed to provide a "real rate of
return"--a return after adjusting for the impact of inflation. Inflation--a
rise in the general price level--erodes the purchasing power of an investor's
portfolio. For example, if an investment provides a "nominal" total return of
5% in a given year and inflation is 2% during that period, the
inflation-adjusted, or real, return is 3%. Inflation, as measured by the CPI,
has occurred in each of the past 50 years, so investors should be conscious
of both the nominal and the real returns on their investments. Investors in
inflation-indexed bond funds who do not reinvest the portion of the income
distribution that comes from inflation adjustments will not maintain the
purchasing power of the investment over the long term. This is because
interest earned depends on the amount of principal invested, and that
principal won't grow with inflation if the investor does not reinvest the
principal adjustment paid out as part of a fund's income distributions.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND INTEREST RATES
Interest rates on conventional bonds have two primary components: a "real"
yield and an increment that reflects investor expectations of future
inflation. By contrast, interest rates on an IIS are adjusted for inflation
and, therefore, aren't affected meaningfully by inflation expectations. This
leaves only real rates to influence the price of an IIS. A rise in real rates
will cause the price of an IIS to fall, while a decline in real rates will
boost the price of an IIS.
[FLAG]
The Fund is subject, to a limited extent, to credit risk, which is the chance
that a bond issuer will fail to pay interest and principal in a timely manner,
or that negative perceptions of the issuer's ability to make such payments will
cause the price of that bond to decline.
The credit quality of the Fund depends on the quality of its investments.
Because the Fund emphasizes securities backed by the full faith and credit of
the U.S. government, the average credit quality of the Fund's holdings is
expected to be high and, consequently, credit risk should be low for the Fund.
As of December 31, 2007, the dollar-weighted average credit quality of the
Fund's holdings, as rated by Moody's Investors Service, Inc., was Aaa. At a
minimum, all bonds purchased by the Fund will be rated investment-grade (in one
of the four highest rating categories) or will be unrated bonds considered by
the advisor to be investment-grade.
8
PLAIN TALK ABOUT CREDIT QUALITY
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND TAXES
Any increase in principal for an IIS resulting from inflation adjustments is
considered by the IRS to be taxable income in the year it occurs. For direct
holders of an IIS, this means that taxes must be paid on principal
adjustments even though these amounts are not received until the bond
matures. By contrast, a mutual fund holding IISs pays out (to shareholders)
both interest income and the income attributable to principal adjustments
each quarter in the form of cash or reinvested shares, and the shareholders
must pay taxes on the distributions.
SECURITY SELECTION
The Fund emphasizes inflation-indexed bonds issued by the U.S. government,
although it may also purchase inflation-indexed bonds issued by agencies and
instrumentalities of the U.S. government and by corporations. The Fund may
invest in bonds of any maturity, but is expected to maintain a dollar-weighted
average maturity in the range of 7 to 20 years.
The Vanguard Group (Vanguard), advisor to the Fund, buys and sells securities
based on its judgment about issuers, the prices of the securities, and other
economic factors. While the advisor uses the Lehman Brothers U.S. Treasury
Inflation Notes Index as a benchmark for the Fund's performance, the Fund's
average maturity and mix of bonds may differ from those of the index. This may
occur, for example, when the advisor sees an opportunity to enhance returns.
9
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
OTHER INVESTMENT POLICIES AND RISKS
Up to 20% of the Fund's assets may be invested in holdings that are not
inflation-indexed. The Fund typically will make such investments when
inflation-indexed bonds are less attractive. The Fund's non-inflation-indexed
holdings may include the following:
- Corporate debt obligations--usually called bonds--represent loans by an
investor to a corporation.
- U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
- Cash investments is a blanket term that describes a variety of short-term
fixed income investments, including money market instruments, commercial paper,
bank certificates of deposit, banker's acceptances, and repurchase agreements.
Repurchase agreements represent short-term (normally overnight) loans by the
Fund to commercial banks or large securities dealers.
- Illiquid securities are securities that the Fund may not be able to sell in
the ordinary course of business. The Fund may invest up to 15% of its net assets
in these securities. Restricted securities are a special type of illiquid
security; these securities have not been publicly issued and legally can be
resold only to qualified buyers. From time to time, the board of trustees may
determine that particular restricted securities are not illiquid, and those
securities may then be purchased by the Fund without limit.
- Mortgage dollar rolls are transactions in which the Fund sells mortgage-backed
securities to a dealer and simultaneously agrees to purchase similar securities
in the future at a predetermined price. These transactions simulate an
investment in mortgage-backed securities and have the potential to enhance the
Fund's returns and reduce its administrative burdens, compared with holding
mortgage-backed securities directly. These transactions may increase the Fund's
portfolio turnover rate. Mortgage dollar rolls will be used only if consistent
with the Fund's investment objective and risk profile.
10
[FLAG]
The Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Fund
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
- Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
- Add value when these instruments are attractively priced; or
- Adjust sensitivity to changes in interest rates.
The Fund's derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
CASH MANAGEMENT
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
11
TEMPORARY INVESTMENT MEASURES
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
FREQUENT TRADING OR MARKET-TIMING
BACKGROUND. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
POLICIES TO ADDRESS FREQUENT TRADING. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
12
- Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
- Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the SHARE PRICE
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for intermediate government funds was approximately 247%, as reported by
Morningstar, Inc., on December 31, 2007.
PLAIN TALK ABOUT TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markup and other transaction costs will have on its return. Also,
funds with high turnover rates may be more likely to generate capital gains
that must be distributed to shareholders as taxable income.
13
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
INVESTMENT ADVISOR
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began
operations in 1975, serves as advisor to the Fund through its Fixed Income
Group. As of December 31, 2007, Vanguard served as advisor for approximately $1
trillion in assets. Vanguard manages the Fund on an at-cost basis, subject to
the supervision and oversight of the trustees and officers of the Fund.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended July 31, 2007 (or June 30, 2008).
GEORGE U. SAUTER is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index
14
bond funds, stable value portfolios, and money market funds. Since joining
Vanguard in 1987, Mr. Sauter has been a key contributor to the development of
Vanguard's stock indexing and active quantitative equity investment strategies.
He received his A.B. in Economics from Dartmouth College and an M.B.A. in
Finance from the University of Chicago.
ROBERT F. AUWAERTER is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS
The managers primarily responsible for the day-to-day management of the Fund
are:
JOHN W. HOLLYER, CFA, Principal of Vanguard. He has managed investment
portfolios since joining Vanguard in 1989 and has co-managed the Fund since
its inception. Education: B.S., University of Pennsylvania.
KENNETH E. VOLPERT, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; and has co-managed the Fund since its inception.
Education: B.S., University of Illinois; M.B.A., University of Chicago.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
less expenses) as well as any net capital gains realized from the sale of its
holdings. In certain circumstances, the Fund also may distribute return of
capital. Income dividends generally are distributed quarterly in March, June,
September, and December; capital gains distributions generally occur annually in
December. In addition, the Fund may occasionally be required to make
supplemental distributions at some other time during the year. You can receive
distributions of income or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
15
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest as well as gains from the sale of investments. Income consists of
interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than
it paid for them. These capital gains are either short-term or long-term,
depending on whether the fund held the securities for one year or less or for
more than one year. You receive the fund's earnings as either a dividend or
capital gains distribution.
PLAIN TALK ABOUT RETURN OF CAPITAL
Return of capital is the portion of a distribution representing the return of
your original investment in the Fund. Return of capital reduces your cost
basis in the Fund's shares, and is not taxable to you until your cost basis
has been reduced to zero. During periods of deflation, the Fund's
inflation-indexed bonds may experience a downward adjustment in their value.
If the downward adjustment more than offsets the income earned by the bonds,
the adjustment may cause a portion of the dividends previously distributed to
shareholders and classified as income to be reclassified as return of
capital.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
- Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of January--are
taxable for federal income tax purposes as if received in December.
- Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
16
- Your cost basis in the Fund will be decreased by the amount of any return of
capital that you receive. This, in turn, will affect the amount of any capital
gain or loss that you realize when selling or exchanging your Fund shares.
- Return-of-capital distributions generally are not taxable to you, unless your
cost basis has been reduced to zero. If your cost basis is at zero,
return-of-capital distributions will be treated as capital gains.
- A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
government may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this exemption.
- Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
- Provide us with your correct taxpayer identification number;
- Certify that the taxpayer identification number is correct; and
- Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
17
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax advisor for detailed information about
a fund's tax consequences for you.
PLAIN TALK ABOUT "BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund makes a distribution, because doing so can cost you money in
taxes. This is known as "buying a dividend." For example: On December 15, you
invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price will drop to $19
(not counting market change). You still have only $5,000 (250 shares x $19 =
$4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
owe tax on the $250 distribution you received--even if you reinvest it in
more shares. To avoid "buying a dividend," check a fund's distribution
schedule before you invest.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
18
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Institutional Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Institutional Share. The
total returns in the table represent the rate that an investor would have earned
or lost each period on an investment in the Institutional Shares (assuming
reinvestment of all distributions). This information has been derived from the
financial statements audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
19
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Institutional Shares began the fiscal year ended December 31, 2007, with
a net asset value (price) of $9.44 per share. During the year, each
Institutional Share earned $0.532 from investment income (interest) and
$0.521 from investments that had appreciated in value or that were sold for
higher prices than the Fund paid for them.
Shareholders received $0.533 per share in the form of dividend distributions.
There was no return of capital. A portion of each year's distributions may
come from the prior year's income or capital gains.
The share price at the end of the year was $9.96, reflecting earnings of
$1.053 per share and distributions of $0.533 per share. This was an increase
of $0.52 per share (from $9.44 at the beginning of the year to $9.96 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 11.58% for the year.
As of December 31, 2007, the Institutional Shares had approximately $2.2
billion in net assets. For the year, the annualized expense ratio was 0.08%
($0.80 per $1,000 of net assets), and the annualized net investment income
amounted to 6.04% of average net assets. The Fund sold and replaced
securities valued at an annualized rate of 21% of its net assets.
20
INFLATION-PROTECTED SECURITIES FUND INSTITUTIONAL SHARES
Feb. 1, Dec. 12,
2007 to Year Ended January 31, 2003/2/ to
Dec. 31, ----------------------------- Jan. 31,
2007/1/ 2007 2006 2005 2004
------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.44 $9.74 $10.06 $9.88 $10.00
------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
------------------------------------------------------------------------------------------------------
Net Investment Income .532 .398 .471 .483 --
------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments .521 (.348) (.194) .207 .080
------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.053 .050 .277 .690 .080
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.533) (.335) (.556) (.458) (.104)
------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.041) (.052) (.096)
------------------------------------------------------------------------------------------------------
Return of Capital -- (.015) -- -- --
------------------------------------------------------------------------------------------------------
Total Distributions (.533) (.350) (.597) (.510) (.200)
------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.96 $9.44 $9.74 $10.06 $9.88
======================================================================================================
TOTAL RETURN 11.58% 0.57% 2.79% 7.15% 0.83%
======================================================================================================
RATIOS/SUPPLEMENTAL DATA
------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,248 $1,673 $1,238 $601 $204
------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.08%/3/ 0.08% 0.08% 0.11% 0.12%/3/
------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 6.04%/3/ 3.99% 4.95% 4.93% --/4/
------------------------------------------------------------------------------------------------------
Turnover Rate 21% 53% 47% 73% 63%
======================================================================================================
1 The fund's fiscal year-end changed from January 31 to December 31, effective December 31, 2007.
2 Inception.
3 Annualized.
4 Negative inflation adjustments and premium amortization completely offset
coupon income for the period December 12, 2003, to January 31, 2004.
|
21
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
Each fund you hold in an account is a separate "fund account." For example, if
you hold three funds in a nonretirement account titled in your own name, two
funds in a nonretirement account titled jointly with your spouse, and one fund
in an individual retirement account, you have six fund accounts--and this is
true even if you hold the same fund in multiple accounts.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
ACCOUNT MINIMUMS FOR INSTITUTIONAL SHARES
TO OPEN AND MAINTAIN AN ACCOUNT. $5 million. Vanguard institutional clients may
meet the minimum investment amount by aggregating up to three separate accounts
within the same Fund. This policy does not apply to clients receiving special
administrative services from Vanguard, nor does this policy apply to omnibus
accounts maintained by financial intermediaries.
TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
HOW TO INITIATE A PURCHASE REQUEST
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your purchase request.
ONLINE. You may open certain types of accounts, request an electronic bank
transfer, and make an exchange (using the proceeds from the redemption of shares
from one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund) through our website at www.vanguard.com if you are a registered user.
BY TELEPHONE. You may call Vanguard to begin the account registration process
or request that the account-opening forms be sent to you. You may also request a
purchase of shares by wire, by electronic bank transfer, or by an exchange. See
Contacting Vanguard.
22
BY MAIL. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. For a list of Vanguard
addresses, see Contacting Vanguard.
HOW TO PAY FOR A PURCHASE
BY ELECTRONIC BANK TRANSFER. You may purchase shares of a Vanguard fund through
an electronic transfer of money held in a designated bank account. To establish
the electronic bank transfer option on an account, you must designate a bank
account online, complete a special form, or fill out the appropriate section of
your account registration form. After the option is set up on your account, you
can purchase shares by electronic bank transfer on a regular schedule (Automatic
Investment Plan) or whenever you wish. Your purchase request can be initiated
online, by telephone, or by mail.
BY WIRE. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. See
Contacting Vanguard.
BY CHECK. You may send a check to make initial or additional purchases to your
fund account. Also see How to Initiate a Purchase Request: By mail. Make your
check payable to Vanguard and include the appropriate fund number (e.g.,
Vanguard--1190). See Contacting Vanguard.
BY EXCHANGE. You may purchase shares of a Vanguard fund using the proceeds from
the simultaneous redemption of shares from another Vanguard fund. You may
initiate an exchange online (if you are a registered user of Vanguard.com), by
telephone, or by mail. See Exchanging Shares.
TRADE DATE
The trade date for any purchase request received in good order will depend on
the day and time Vanguard receives your request, the manner in which you are
paying, and the type of fund you are purchasing. Your purchase will be executed
using the fund's NAV as calculated on the trade date. NAVs are calculated only
on days the New York Stock Exchange (NYSE) is open for trading (a business day).
For purchases by CHECK into all funds other than money market funds, and for
purchases by EXCHANGE or WIRE into all funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the purchase request is received on a business day after the close of regular
trading on the NYSE, or on a nonbusiness day, the trade date will be the next
business day.
23
For purchases by CHECK into money market funds: If the purchase request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the next
business day. If the purchase request is received on a business day after the
close of regular trading on the NYSE, or on a nonbusiness day, the trade date
will be the second business day following the day Vanguard receives the purchase
request. Because money market instruments must be purchased with federal funds
and it takes a money market mutual fund one business day to convert check
proceeds into federal funds, the trade date will be one business day later than
for other funds.
For purchases by electronic bank transfer using an AUTOMATIC INVESTMENT PLAN:
Your trade date generally will be one business day before the date you
designated for withdrawal from your bank account.
For purchases by ELECTRONIC BANK TRANSFER not using an Automatic Investment
Plan: If the purchase request is received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the next business day. If the
purchase request is received on a business day after 10 p.m., Eastern time, or
on a nonbusiness day, the trade date will be the second business day following
the day Vanguard receives the request.
If your purchase request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
OTHER PURCHASE RULES YOU SHOULD KNOW
CHECK PURCHASES. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
NEW ACCOUNTS. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
REFUSED OR REJECTED PURCHASE REQUESTS. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
24
LARGE PURCHASES. Please call Vanguard before attempting to invest a large
dollar amount.
NO CANCELLATIONS. Vanguard will not accept your request to cancel any purchase
request once processing has begun. Please be careful when placing a purchase
request.
CONVERTING SHARES
When a conversion occurs, you receive shares of one class in place of shares of
another class of the same fund. At the time of conversion, the dollar value of
the "new" shares you receive equals the dollar value of the "old" shares that
were converted. In other words, the conversion has no effect on the value of
your investment in the fund. However, the number of shares you own after the
conversion may be greater than or less than the number of shares you owned
before the conversion, depending on the net asset values of the two share
classes.
A conversion between share classes of the same fund is a nontaxable event.
TRADE DATE
The trade date for any conversion request received in good order will depend on
the day and time Vanguard receives your request. Your conversion will be
executed using the NAV of the different share classes on the trade date. NAVs
are calculated only on days the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close
of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day. For a conversion request received on a business day after
the close of regular trading on the NYSE, or on a nonbusiness day, the trade
date will be the next business day. See Other Rules You Should Know.
CONVERSIONS TO INSTITUTIONAL SHARES
You are eligible for a self-directed conversion from another share class to
Institutional Shares of the same Fund, provided that your account meets all
Institutional Shares' eligibility requirements. Registered users of our website,
www.vanguard.com, may request a conversion online, or you may contact Vanguard
by telephone or by mail to request this transaction. Accounts that qualify for
Institutional Shares will not be automatically converted.
25
MANDATORY CONVERSIONS TO ANOTHER SHARE CLASS
If an account no longer meets the balance requirements for Institutional Shares,
Vanguard may automatically convert the shares in the account to another share
class, as appropriate. A decline in the account balance because of market
movement may result in such a conversion. Vanguard will notify the investor in
writing before any mandatory conversion occurs.
REDEEMING SHARES
HOW TO INITIATE A REDEMPTION REQUEST
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your redemption request.
ONLINE. You may redeem shares, request an electronic bank transfer, and make an
exchange (the purchase of shares of one Vanguard fund using the proceeds of a
simultaneous redemption from another Vanguard fund) through our website at
www.vanguard.com if you are a registered user.
BY TELEPHONE. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
BY MAIL. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. See Contacting Vanguard.
BY WRITING A CHECk. If you've established the checkwriting service on your
account, you can redeem shares by writing a check for $250 or more.
HOW TO RECEIVE REDEMPTION PROCEEDS
BY ELECTRONIC BANK TRANSFER. You may have the proceeds of a fund redemption
sent directly to a designated bank account. To establish the electronic bank
transfer option, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can redeem shares by electronic
bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or
whenever you wish ($100 minimum). Your transaction can be initiated online, by
telephone, or by mail.
BY WIRE. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
26
BY EXCHANGE. You may have the proceeds of a Vanguard fund redemption invested
directly in shares of another Vanguard fund. You may initiate an exchange online
(if you are a registered user of Vanguard.com), by telephone, or by mail.
BY CHECK. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
TRADE DATE
The trade date for any redemption request received in good order will depend on
the day and time Vanguard receives your request and the manner in which you are
redeeming. Your redemption will be executed using the fund's NAV as calculated
on the trade date. NAVs are calculated only on days that the NYSE is open for
trading (a business day.)
For redemptions by CHECK, EXCHANGE, or WIRE: If the redemption request is
received by Vanguard on a business day before the close of regular trading on
the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day.
If the redemption request is received on a business day after the close of
regular trading on the NYSE, or on a nonbusiness day, the trade date will be the
next business day.
- Note on timing of wire redemptions from money market funds: For telephone
requests received by Vanguard on a business day before 10:45 a.m., Eastern
time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the
redemption proceeds will leave Vanguard by the close of business the same day.
For telephone requests received by Vanguard on a business day after those
cut-off times, or on a nonbusiness day, and for all requests other than by
telephone, the redemption proceeds will leave Vanguard by the close of
business on the next business day.
- Note on timing of wire redemptions from bond funds: For requests received by
Vanguard on a business day before the close of regular trading on the NYSE
(generally 4 p.m., Eastern time), the redemption proceeds will leave Vanguard
by the close of business on the next business day. For requests received by
Vanguard on a business day after the close of regular trading on the NYSE, or
on a nonbusiness day, the redemption proceeds will leave Vanguard by the close
of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an AUTOMATIC WITHDRAWAL PLAN:
Your trade date generally will be the date you designated for withdrawal of
funds (redemption of shares) from your Vanguard account. Proceeds of redeemed
shares generally will be credited to your designated bank account two business
days after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
27
For redemptions by ELECTRONIC BANK TRANSFER not using an Automatic Withdrawal
Plan: If the redemption request is received by Vanguard on a business day before
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the
trade date generally will be the same day. If the redemption request is received
on a business day after the close of regular trading on the NYSE, or on a
nonbusiness day, the trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. See
Other Rules You Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
OTHER REDEMPTION RULES YOU SHOULD KNOW
DOCUMENTATION FOR CERTAIN ACCOUNTS. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, or
retirement accounts. Please call us before attempting to redeem from these types
of accounts.
POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in market-timing
or frequent trading. Under these circumstances, Vanguard also reserves the right
to delay payment of the redemption proceeds for up to seven calendar days. By
calling us before you attempt to redeem a large dollar amount, you may avoid
in-kind or delayed payment of your redemption. Please see Frequent-Trading
Limits for information about Vanguard's policies to limit frequent trading.
RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds
may not be made available to you until the fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
ADDRESS CHANGE. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
28
PAYMENT TO A DIFFERENT PERSON OR ADDRESS. At your request, we can make your
redemption check payable, or wire your redemption proceeds, to a different
person or send it to a different address. However, this requires the written
consent of all registered account owners and may require a signature guarantee.
You can obtain a signature guarantee from most commercial and savings banks,
credit unions, trust companies, or member firms of a U.S. stock exchange. A
notary public cannot provide a signature guarantee.
NO CANCELLATIONS. Vanguard will not accept your request to cancel any
redemption request once processing has begun. Please be careful when placing a
redemption request.
EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
An exchange occurs when you use the proceeds from the redemption of shares of
one Vanguard fund to simultaneously purchase shares of a different Vanguard
fund. You can make exchange requests online (if you are a registered user of
Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming
Shares.
If the NYSE is open for regular trading (a business day) at the time an exchange
request is received in good order, the trade date will generally be the same
day. See Other Rules You Should Know--Good Order for additional information on
all transaction requests.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
29
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
- Purchases of shares with reinvested dividend or capital gains distributions.
- Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
- Redemptions of shares to pay fund or account fees.
- Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
- Transfers and re-registrations of shares within the same fund.
- Purchases of shares by asset transfer or direct rollover.
- Conversions of shares from one share class to another in the same fund.
- Checkwriting redemptions.
- Section 529 college savings plans.
- Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
- Purchases of shares with participant payroll or employer contributions or
loan repayments.
- Purchases of shares with reinvested dividend or capital gains distributions.
- Distributions, loans, and in-service withdrawals from a plan.
- Redemptions of shares as part of a plan termination or at the direction of the
plan.
- Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
30
- Redemptions of shares to pay fund or account fees.
- Share or asset transfers or rollovers.
- Re-registrations of shares.
- Conversions of shares from one share class to another in the same fund.
- Exchange requests submitted by mail to Vanguard. (Exchange requests submitted
by fax or wire are not mail requests and remain subject to the policy.)
ACCOUNTS HELD BY INSTITUTIONS (OTHER THAN DEFINED CONTRIBUTION PLANS)
Vanguard will systematically monitor for frequent trading in institutional
clients' accounts. If we detect suspicious trading activity, we will investigate
and take appropriate action, which may include applying to a client's accounts
the 60-day policy previously described, prohibiting a client's purchases of fund
shares, and/or eliminating the client's exchange privilege.
ACCOUNTS HELD BY INTERMEDIARIES
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
PROSPECTUS AND SHAREHOLDER REPORT MAILINGS
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
31
VANGUARD.COM
REGISTRATION. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
ELECTRONIC DELIVERY. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under
"Account Profile." You can revoke your electronic consent at any time, and we
will begin to send paper copies of these documents within 30 days of receiving
your notice.
TELEPHONE TRANSACTIONS
AUTOMATIC. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
TELE-ACCOUNT/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
- Authorization to act on the account (as the account owner or by legal
documentation or other means).
- Account registration and address.
- Fund name and account number, if applicable.
- Other information relating to the caller, the account holder, or the account.
SUBJECT TO REVISION. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
GOOD ORDER
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
- The fund name and account number.
- The amount of the transaction (stated in dollars, shares, or percentage).
32
Written instructions also must include:
- Signatures of all registered owners.
- Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
- Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
FUTURE TRADE-DATE REQUESTS
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
ACCOUNTS WITH MORE THAN ONE OWNER
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private, and immediately review any account
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
33
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
LOW-BALANCE ACCOUNTS
The Fund reserves the right to convert an investor's Institutional Shares to
another share class, as appropriate, if the fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. Any
such conversion will be preceded by written notice to the investor.
RIGHT TO CHANGE POLICIES
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon initial notification to Vanguard of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.
SHARE CLASSES
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
34
FUND AND ACCOUNT UPDATES
CONFIRMATION STATEMENTS
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
PORTFOLIO SUMMARIES
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
TAX STATEMENTS
For most taxable accounts, we will send annual tax statements to assist you in
preparing your income tax returns. These statements, which are generally mailed
in January, will report the previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs and
other retirement plans. These statements can be viewed online.
AVERAGE-COST REVIEW STATEMENTS
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
35
ANNUAL AND SEMIANNUAL REPORTS
We will send (or provide online, whichever you prefer) financial reports about
Vanguard Inflation-Protected Securities Fund twice a year, in February and
August. These comprehensive reports include overviews of the financial markets
and provide the following specific Fund information:
- Performance assessments and comparisons with industry benchmarks.
- Reports from the advisor.
- Financial statements with listings of Fund holdings.
PORTFOLIO HOLDINGS
We generally post on our website at www.vanguard.com, in the HOLDINGS section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
36
CONTACTING VANGUARD
WEB
------------------------------------------------------------------------------------------------------------
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days a week For fund, account, and service information
For most account transactions
For literature requests
------------------------------------------------------------------------------------------------------------
PHONE
------------------------------------------------------------------------------------------------------------
Vanguard Tele-Account/(R)/ 800-662-6273 For automated fund and account information
(ON-BOARD) For exchange transactions (subject to limitations)
Toll-free, 24 hours a day, 7 days a week
------------------------------------------------------------------------------------------------------------
Investor Information 800-662-7447 (SHIP) For fund and service information
(Text telephone for people with hearing For literature requests
impairment at 800-952-3335) Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Client Services 800-662-2739 (CREW) For account information
(Text telephone for people with hearing For most account transactions
impairment at 800-749-7273) Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
------------------------------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
------------------------------------------------------------------------------------------------------------
Intermediary Sales Support For information and services for financial intermediaries
800-997-2798 including broker-dealers, trust institutions, insurance
companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to 7 p.m.,
Eastern time
------------------------------------------------------------------------------------------------------------
|
37
VANGUARD ADDRESSES
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
REGULAR MAIL (INDIVIDUALS) The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
----------------------------------------------------------------------
REGULAR MAIL (INSTITUTIONS) The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
----------------------------------------------------------------------
REGISTERED, EXPRESS, OR OVERNIGHT The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
|
FUND NUMBER
Please use the specific fund number when contacting us:
Vanguard Inflation-Protected Securities Fund 1190
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business Online, and
the ship logo are trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark
owned by CFA Institute. All other marks are the exclusive property of their
respective owners.
38
GLOSSARY OF INVESTMENT TERMS
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity and are repaid. In general, the longer the average maturity, the more a
fund's share price fluctuates in response to changes in market interest rates.
In calculating average maturity, a fund uses a bond's maturity or, if
applicable, an earlier date on which the advisor believes it is likely that a
maturity-shortening device (such as a call, put, refunding, prepayment or
redemption provision, or an adjustable coupon) will cause the bond to be repaid.
BOND. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
CAPITAL GAINS DISTRIBUTION. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
CASH INVESTMENTS. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
COUPON. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
DIVIDEND DISTRIBUTION. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
FACE VALUE. The amount to be paid at a bond's maturity; also known as the par
value or principal.
FIXED INCOME SECURITY. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
INCEPTION DATE. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
INFLATION-INDEXED SECURITIES. Bonds issued by the U.S. government, government
agencies, or corporations, whose principal and interest payments--unlike those
of conventional bonds--are adjusted over time to reflect inflation.
39
INVESTMENT-GRADE BOND. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
MATURITY. The date when a bond issuer agrees to repay the bond's principal, or
face value, to the bond's buyer.
NET ASSET VALUE (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
PRINCIPAL. The face value of a debt instrument or the amount of money put into
an investment.
RETURN OF CAPITAL. A return of all or part of your original investment in the
Fund. In general, return of capital reduces your cost basis in a Fund's shares
and is not taxable to you, but return of capital after your cost basis has been
reduced to zero is taxable as capital gains.
SECURITIES. Stocks, bonds, money market instruments, and other investment
vehicles.
TOTAL RETURN. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
VOLATILITY. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
YIELD. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
40
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[SHIP LOGO] [VANGUARD/(R)/ LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
FOR MORE INFORMATION
If you would like more information about Vanguard Inflation-Protected Securities
Fund, the following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
If you are an individual investor:
The Vanguard Group
Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-662-7447 (SHIP); Text telephone for people with hearing
impairment: 800-952-3335
If you are a client of Vanguard's Institutional Division:
The Vanguard Group
Institutional Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 888-809-8102; Text telephone for people with hearing impairment:
800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW); Text telephone for people with hearing
impairment: 800-749-7273
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I1190 042008
VANGUARD/(R)/ INFLATION-PROTECTED
SECURITIES FUND
> PROSPECTUS
INVESTOR SHARES
April 25, 2008
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
This prospectus contains financial data for the Fund through the fiscal year
ended December 31, 2007.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
CONTENTS
-----------------------------------------------------------------------
Fund Profile 1 Financial Highlights 15
-----------------------------------------------------------------------
More on the Fund 4 General Information 18
-----------------------------------------------------------------------
The Fund and Vanguard 12 Glossary of Investment Terms 20
-----------------------------------------------------------------------
Investment Advisor 12
-----------------------------------------------------------------------
Taxes 13
-----------------------------------------------------------------------
Share Price 14
-----------------------------------------------------------------------
|
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided Plain Talk/(R)/ explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Fund's Investor Shares and is intended for investors
who would like to open an income annuity (also referred to as an immediate
annuity) account through a contract offered by an insurance company. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 800-662-7447.
A NOTE ABOUT INVESTING IN THE FUND
The Fund is a mutual fund used as an investment option for income annuity
programs offered by insurance companies and for personal investment accounts.
When investing through an insurance company, you cannot purchase shares of the
Fund directly, but only through a contract offered by the insurance company.
The Fund's income annuity accounts' performance will differ from the performance
of personal investment accounts because of administrative and insurance costs
associated with the income annuity programs.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE COMPANY OR ANY OTHER GOVERNMENT
AGENCY.
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide inflation protection and income consistent with
investment in inflation-indexed securities.
PRIMARY INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in inflation-indexed bonds issued by
the U.S. government, its agencies and instrumentalities, and corporations. The
Fund may invest in bonds of any maturity; however, its dollar-weighted average
maturity is expected to be in the range of 7 to 20 years. At a minimum, all
bonds purchased by the Fund will be rated "investment-grade." For additional
information on the Fund's investment strategies, please see MORE ON THE FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall bond market. The Fund's performance
could be hurt by:
- Income fluctuations. The Fund's quarterly income distributions are likely to
fluctuate considerably more than the income distributions of a typical bond
fund. Income fluctuations associated with changes in interest rates are expected
to be low; however, income fluctuations associated with changes in inflation are
expected to be high. Overall, investors can expect income fluctuations to be
high for the Fund.
- Interest rate risk, which is the chance that bond prices overall will decline
because of rising interest rates. Interest rate risk is expected to be moderate
for the Fund.
- Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of a relevant market index. The bar chart and table do not reflect additional
fees and expenses that are deducted by the income annuity program through which
you invest. If such fees and expenses were included in the calculation of the
Fund's returns, the returns would be lower. Keep in mind that the Fund's past
performance does not indicate how the Fund will perform in the future.
1
ANNUAL TOTAL RETURNS--INVESTOR SHARES
[Bar Chart Range: -20% to 30%]
2001 7.61
2002 16.61
2003 8.00
2004 8.27
2005 2.59
2006 0.43
2007 11.59
------------------------------------------------------------
|
During the periods shown in the bar chart, the highest return for a calendar
quarter was 7.96% (quarter ended September 30, 2002), and the lowest return for
a quarter was -3.04% (quarter ended June 30, 2004).
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2007
Since
1 Year 5 Years Inception/1/
------------------------------------------------------------------------------------------------------------------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND INVESTOR SHARES 11.59% 6.10% 8.06%
------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX
(reflects no deduction for fees or expenses) 11.63% 6.27% 8.22%
------------------------------------------------------------------------------------------------------------------------
1 Since-inception returns are from June 29, 2000--the inception date of the Investor Shares--through December 31, 2007.
|
A NOTE ON FEES
As an investor in the Fund, you would incur various operating costs, including
management, advisory, and distribution expenses. Detailed information about the
costs of operating the Fund appears in the table titled Annual Fund Operating
Expenses. You also would incur fees associated with the income annuity program
through which you invest. Detailed information about the annuity program fees is
presented in the "Fee Table" section of the accompanying prospectus for the
annuity program through which Fund shares are offered.
2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
December 31, 2007.
SHAREHOLDER FEES
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
|
ANNUAL FUND OPERATING EXPENSES
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.16%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.20%
-------------------------------------------------------------------------
|
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund's shares. This example assumes that the Shares
provide a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$20 $64 $113 $255
--------------------------------------------------------
|
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
3
PLAIN TALK ABOUT COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's
because you, as a contract owner, pay the costs of operating a fund, plus any
transaction costs incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
MORE ON THE FUND
This prospectus describes the primary risks you would face as an investor in
this Fund. It is important to keep in mind one of the main axioms of investing:
The higher the risk of losing money, the higher the potential reward. The
reverse, also, is generally true: The lower the risk, the lower the potential
reward. As you consider an investment in any mutual fund, you should take into
account your personal tolerance for fluctuations in the securities markets. Look
for this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about the more significant risks that you would confront as a Fund
investor.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Note that the Fund's
investment objective is not fundamental and may be changed without a shareholder
vote. However, the Fund's policy of investing at least 80% of its assets in
inflation-indexed bonds may be changed only upon 60 days' notice to
shareholders.
MARKET EXPOSURE
The Fund invests mainly in a diversified group of investment-grade,
inflation-indexed bonds. As a result of this investment strategy, the Fund is
subject to certain risks.
4
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES
Unlike a conventional bond, whose issuer makes regular fixed interest
payments and repays the face value of the bond at maturity, an
inflation-indexed security (IIS) provides principal and interest payments
that are adjusted over time to reflect a rise (inflation) or a drop
(deflation) in the general price level for goods and services. This
adjustment is a key feature, given that the Consumer Price Index (CPI) has
risen in each of the past 50 years. (Source: Bureau of Labor Statistics.)
Importantly, in the event of deflation, the U.S. Treasury has guaranteed that
it will repay at least the face value of an IIS issued by the U.S.
government.
Inflation measurement and adjustment for an IIS have two important features.
There is a two-month lag between the time that inflation occurs in the
economy and when it is factored into IIS valuations. This is due to the time
required to measure and calculate the CPI and for the Treasury to adjust the
inflation accrual schedules for an IIS. For example, inflation that occurs in
January is calculated and announced during February and affects IIS
valuations throughout the month of March. In addition, the inflation index
used is the non-seasonally adjusted index. It differs from the CPI that is
reported by most news organizations, which is statistically smoothed to
overcome highs and lows observed at different points each year. The use of
the non-seasonally adjusted index can cause the Fund's income level to
fluctuate.
[FLAG]
The Fund is subject to income fluctuations. The Fund's quarterly income
distributions are likely to fluctuate considerably more than the income
distributions of a typical bond fund. Income fluctuations associated with
CHANGES IN INTEREST RATES are expected to be low; however, income fluctuations
resulting from CHANGES IN INFLATION are expected to be high. Overall, investors
can expect income fluctuations to be high for the Fund.
While fluctuations in quarterly income distributions are expected to be high,
distributions should, over the long term, provide an income yield that exceeds
inflation. That said, in periods of extreme deflation, the Fund may have no
income at all to distribute.
Changes in interest rates can affect bond income as well as bond prices.
[FLAG]
The Fund is subject to interest rate risk, which is the chance that bond prices
overall will decline because of rising interest rates. Interest rate risk
should be moderate for the Fund.
5
PLAIN TALK ABOUT REAL RETURNS
Inflation-indexed securities are designed to provide a "real rate of
return"--a return after adjusting for the impact of inflation. Inflation--a
rise in the general price level--erodes the purchasing power of an investor's
portfolio. For example, if an investment provides a "nominal" total return of
5% in a given year and inflation is 2% during that period, the
inflation-adjusted, or real, return is 3%. Inflation, as measured by the CPI,
has occurred in each of the past 50 years, so investors should be conscious
of both the nominal and the real returns on their investments. Investors in
inflation-indexed bond funds who do not reinvest the portion of the income
distribution that comes from inflation adjustments will not maintain the
purchasing power of the investment over the long term. This is because
interest earned depends on the amount of principal invested, and that
principal won't grow with inflation if the investor does not reinvest the
principal adjustment paid out as part of a fund's income distributions.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND INTEREST RATES
Interest rates on conventional bonds have two primary components: a "real"
yield and an increment that reflects investor expectations of future
inflation. By contrast, interest rates on an IIS are adjusted for inflation
and, therefore, aren't affected meaningfully by inflation expectations. This
leaves only real rates to influence the price of an IIS. A rise in real rates
will cause the price of an IIS to fall, while a decline in real rates will
boost the price of an IIS.
[FLAG]
The Fund is subject, to a limited extent, to credit risk, which is the chance
that a bond issuer will fail to pay interest and principal in a timely manner,
or that negative perceptions of the issuer's ability to make such payments will
cause the price of that bond to decline.
The credit quality of the Fund depends on the quality of its investments.
Because the Fund emphasizes securities backed by the full faith and credit of
the U.S. government, the average credit quality of the Fund's holdings is
expected to be high and, consequently, credit risk should be low for the Fund.
As of December 31, 2007, the dollar-weighted average credit quality of the
Fund's holdings, as rated by Moody's Investors Service, Inc., was Aaa. At a
minimum, all bonds purchased by the Fund will be rated investment-grade (in one
of the four highest rating categories) or will be unrated bonds considered by
the advisor to be investment-grade.
6
PLAIN TALK ABOUT CREDIT QUALITY
A bond's credit-quality rating is an assessment of the issuer's ability to
pay interest on the bond and, ultimately, to repay the principal. Credit
quality is evaluated by one of the independent bond-rating agencies (for
example, Moody's or Standard & Poor's) or through independent analysis
conducted by a fund's advisor. The lower the rating, the greater the
chance--in the rating agency's or advisor's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being
equal, the lower a bond's credit rating, the higher its yield should be to
compensate investors for assuming additional risk. Investment-grade bonds are
those rated in one of the four highest ratings categories. A fund may treat
an unrated bond as investment-grade if warranted by the advisor's analysis.
PLAIN TALK ABOUT INFLATION-INDEXED SECURITIES AND TAXES
Any increase in principal for an IIS resulting from inflation adjustments is
considered by the IRS to be taxable income in the year it occurs. For direct
holders of an IIS, this means that taxes must be paid on principal
adjustments even though these amounts are not received until the bond
matures. By contrast, a mutual fund holding IISs pays out (to shareholders)
both interest income and the income attributable to principal adjustments
each quarter in the form of cash or reinvested shares, and the shareholders
must pay taxes on the distributions.
SECURITY SELECTION
The Fund emphasizes inflation-indexed bonds issued by the U.S. government,
although it may also purchase inflation-indexed bonds issued by agencies and
instrumentalities of the U.S. government and by corporations. The Fund may
invest in bonds of any maturity, but is expected to maintain a dollar-weighted
average maturity in the range of 7 to 20 years.
The Vanguard Group (Vanguard), advisor to the Fund, buys and sells securities
based on its judgment about issuers, the prices of the securities, and other
economic factors. While the advisor uses the Lehman Brothers U.S. Treasury
Inflation Notes Index as a benchmark for the Fund's performance, the Fund's
average maturity and mix of bonds may differ from those of the index. This may
occur, for example, when the advisor sees an opportunity to enhance returns.
7
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
OTHER INVESTMENT POLICIES AND RISKS
Up to 20% of the Fund's assets may be invested in holdings that are not
inflation-indexed. The Fund typically will make such investments when
inflation-indexed bonds are less attractive. The Fund's non-inflation-indexed
holdings may include the following:
- Corporate debt obligations--usually called bonds--represent loans by an
investor to a corporation.
- U.S. government and agency bonds represent loans by investors to the U.S.
Treasury Department or a wide variety of government agencies and
instrumentalities. Securities issued by most U.S. government entities are
neither guaranteed by the U.S. Treasury nor backed by the full faith and credit
of the U.S. government. These entities include, among others, the Federal Home
Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S.
Treasury and a small number of U.S. government agencies, such as the Government
National Mortgage Association (GNMA), are backed by the full faith and credit of
the U.S. government.
- Cash investments is a blanket term that describes a variety of short-term
fixed income investments, including money market instruments, commercial paper,
bank certificates of deposit, banker's acceptances, and repurchase agreements.
Repurchase agreements represent short-term (normally overnight) loans by the
Fund to commercial banks or large securities dealers.
- Illiquid securities are securities that the Fund may not be able to sell in
the ordinary course of business. The Fund may invest up to 15% of its net assets
in these securities. Restricted securities are a special type of illiquid
security; these securities have not been publicly issued and legally can be
resold only to qualified buyers. From time to time, the board of trustees may
determine that particular restricted securities are not illiquid, and those
securities may then be purchased by the Fund without limit.
- Mortgage dollar rolls are transactions in which the Fund sells mortgage-backed
securities to a dealer and simultaneously agrees to purchase similar securities
in the future at a predetermined price. These transactions simulate an
investment in mortgage-backed securities and have the potential to enhance the
Fund's returns and reduce its administrative burdens, compared with holding
mortgage-backed securities directly. These transactions may increase the Fund's
portfolio turnover rate. Mortgage dollar rolls will be used only if consistent
with the Fund's investment objective and risk profile.
8
[FLAG]
The Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
Generally speaking, a derivative is a financial contract whose value is based on
the value of a financial asset (such as a stock, bond, or currency), a physical
asset (such as gold), or a market index (such as the S&P 500 Index). The Fund
may invest in derivatives only if the expected risks and rewards of the
derivatives are consistent with the investment objective, policies, strategies,
and risks of the Fund as disclosed in this prospectus. The advisor will not use
derivatives to change the risks of the fund as a whole as such risks are
disclosed in this prospectus. In particular, derivatives will be used only where
they may help the advisor:
- Invest in eligible asset classes with greater efficiency and lower cost than
is possible through direct investment;
- Add value when these instruments are attractively priced; or
- Adjust sensitivity to changes in interest rates.
The Fund's derivative investments may include fixed income futures contracts,
fixed income options, interest rate swaps, total return swaps, credit default
swaps, or other derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives.
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
CASH MANAGEMENT
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
9
TEMPORARY INVESTMENT MEASURES
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
FREQUENT TRADING OR MARKET-TIMING
BACKGROUND. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
POLICIES TO ADDRESS FREQUENT TRADING. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
10
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
- Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits an investor's purchases or exchanges into a fund
account for 60 calendar days after the investor has redeemed or exchanged out of
that fund account.
- Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
Each fund (other than money market funds), in determining its net asset value,
will, when appropriate, use fair-value pricing, as described in the SHARE PRICE
section. Fair-value pricing may reduce or eliminate the profitability of certain
frequent-trading strategies.
DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
Shorter-term bonds will mature or be sold--and need to be replaced--more
frequently than longer-term bonds. As a result, shorter-term bond funds tend to
have higher turnover rates than longer-term bond funds. The average turnover
rate for intermediate government funds was approximately 247%, as reported by
Morningstar, Inc., on December 31, 2007.
PLAIN TALK ABOUT TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs, which are not included in the
fund's expense ratio, could affect the fund's future returns. In general, the
greater the volume of buying and selling by the fund, the greater the impact
that dealer markup and other transaction costs will have on its return. Also,
funds with high turnover rates may be more likely to generate capital gains
that must be distributed to shareholders.
11
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
INVESTMENT ADVISOR
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began
operations in 1975, serves as advisor to the Fund through its Fixed Income
Group. As of December 31, 2007, Vanguard served as advisor for approximately $1
trillion in assets. Vanguard manages the Fund on an at-cost basis, subject to
the supervision and oversight of the trustees and officers of the Fund.
For the fiscal year ended December 31, 2007, the advisory expenses represented
an effective annual rate of 0.01% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the most recent semiannual report to shareholders
covering the fiscal period ended July 31, 2007 (or June 30, 2008).
12
GEORGE U. SAUTER is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
ROBERT F. AUWAERTER is head of Vanguard's Fixed Income Group and Principal of
Vanguard. He has direct oversight responsibility for all money market funds,
bond funds, and stable value portfolios managed by the Fixed Income Group. He
has managed investment portfolios since 1978 and has been with Vanguard since
1981. He received his B.S. in Finance from The Wharton School of the University
of Pennsylvania and an M.B.A. from Northwestern University.
PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS
The managers primarily responsible for the day-to-day management of the Fund
are:
JOHN W. HOLLYER, CFA, Principal of Vanguard. He has managed investment
portfolios since joining Vanguard in 1989 and has co-managed the Fund since
its inception. Education: B.S., University of Pennsylvania.
KENNETH E. VOLPERT, CFA, Principal of Vanguard and head of Vanguard's Taxable
Bond Group. He has managed investment portfolios since 1982; has been with
Vanguard since 1992; and has co-managed the Fund since its inception.
Education: B.S., University of Illinois; M.B.A., University of Chicago.
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
TAXES
The tax consequences of your investment in the Fund depend on the provisions of
the income annuity program through which you invest. For more information on
taxes, please refer to the accompanying prospectus of the insurance company that
offers your annuity program.
13
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Each share class has its own NAV, which is
computed by dividing the net assets allocated to each share class by the number
of Fund shares outstanding for that class. On holidays or other days when the
Exchange is closed, the NAV is not calculated, and the Fund does not transact
purchase or redemption requests.
Debt securities held by a Vanguard fund are valued based on information
furnished by an independent pricing service or market quotations. Certain
short-term debt instruments used to manage a fund's cash are valued on the basis
of amortized cost. The values of any mutual fund shares held by a fund are based
on the NAVs of the shares. The values of any ETF or closed-end fund shares held
by a fund are based on the market value of the shares.
When pricing-service information or reliable market quotations are not readily
available, securities are priced at their fair value (the amount that the owner
might reasonably expect to receive upon the current sale of a security). A fund
also may use fair-value pricing (1) on bond market holidays when the fund is
open for business (such as Columbus Day and Veterans Day), or (2) if the value
of a security it holds has been materially affected by events occurring before
the fund's pricing time but after 3 p.m., Eastern time (per industry standard,
pricing services base bond prices on the 3 p.m. yield curve).
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
The Fund's NAV is used to determine the annuity's unit value for the income
annuity program through which you invest. For more information on unit values,
please refer to the accompanying prospectus of the insurance company that offers
your annuity program.
14
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Investor Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
Yields and total returns presented for the Fund are net of the Fund's operating
expenses, but do not take into account charges and expenses attributable to the
income annuity program through which you invest. The expenses of the annuity
program reduce the returns and yields you ultimately receive, so you should bear
those expenses in mind when evaluating the performance of the Fund and when
comparing the yields and returns of the Fund with those of other mutual funds.
15
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Investor Shares began the fiscal year ended December 31, 2007, with a net
asset value (price) of $11.80 per share. During the year, each Investor Share
earned $0.651 from investment income (interest) and $0.646 from investments
that had appreciated in value or that were sold for higher prices than the
Fund paid for them.
Shareholders received $0.647 per share in the form of dividend distributions.
There was no return of capital. A portion of each year's distributions may
come from the prior year's income or capital gains.
The share price at the end of the year was $12.45, reflecting earnings of
$1.297 per share and distributions of $0.647 per share. This was an increase
of $0.65 per share (from $11.80 at the beginning of the year to $12.45 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 11.40% for the year.
As of December 31, 2007, the Investor Shares had approximately $6.7 billion
in net assets. For the year, the annualized expense ratio was 0.20% ($2.00
per $1,000 of net assets), and the annualized net investment income amounted
to 5.92% of average net assets. The Fund sold and replaced securities valued
at an annualized rate of 21% of its net assets.
16
INFLATION-PROTECTED SECURITIES FUND INVESTOR SHARES
Feb. 1,
2007 to Year Ended January 31,
Dec. 31, -----------------------------------------------------
2007/1/ 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.80 $12.18 $12.57 $12.36 $11.91 $10.68
--------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
--------------------------------------------------------------------------------------------------------
Net Investment Income .651 .483 .573 .596 .41 .47
--------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .646 (.437) (.230) .244 .61 1.28
--------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.297 .046 .343 .840 1.02 1.75
--------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
--------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.647) (.407) (.681) (.565) (.45) (.46)
--------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.052) (.065) (.12) (.06)
--------------------------------------------------------------------------------------------------------
Return of Capital -- (.019) -- -- -- --
--------------------------------------------------------------------------------------------------------
Total Distributions (.647) (.426) (.733) (.630) (.57) (.52)
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.45 $11.80 $12.18 $12.57 $12.36 $11.91
========================================================================================================
TOTAL RETURN 11.40% 0.43% 2.76% 6.96% 8.69% 16.64%
========================================================================================================
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $6,662 $5,361 $6,227 $7,530 $5,164 $3,143
--------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.20%/2/ 0.20% 0.20% 0.17% 0.18% 0.22%
--------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 5.92%/2/ 3.87% 4.83% 4.83% 3.46% 4.55%
--------------------------------------------------------------------------------------------------------
Turnover Rate 21% 53% 47% 73% 63% 108%
========================================================================================================
1 The Fund's fiscal year-end changed from January 31 to December 31, effective December 31, 2007.
2 Annualized.
|
17
GENERAL INFORMATION
The Fund offers its shares to insurance companies that offer income annuity
programs. Because of differences in tax treatment or other considerations, the
interests of various contract owners participating in the Fund might at some
time be in conflict. The Fund's board of trustees will monitor for any material
conflicts and determine what action, if any, should be taken.
If the board of trustees determines that continued offering of shares would be
detrimental to the best interests of the Fund's shareholders, the Fund may
suspend the offering of shares for a period of time. If the board of trustees
determines that a specific purchase acceptance would be detrimental to the best
interests of the Fund's shareholders, the Fund may reject such a purchase
request.
If you wish to redeem money from the Fund, please refer to the instructions
provided in the accompanying prospectus of the insurance company that offers
your annuity program. Shares of the Fund may be redeemed on any business day.
The redemption price of shares will be at the next-determined NAV per share.
Redemption proceeds will be wired to the administrator for distribution to the
contract owner generally on the day following receipt of the redemption request,
but no later than seven business days. Contract owners will receive a check from
the administrator for the redemption amount.
The Fund may suspend the redemption right or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the SEC.
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your program. Although
we make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice.
If the board of trustees determines that it would be detrimental to the best
interests of the Fund's remaining shareholders to make payment in cash, the Fund
may pay redemption proceeds in whole or in part by a distribution in kind of
readily marketable securities.
For certain categories of investors, the Fund has authorized one or more brokers
to accept on its behalf purchase and redemption orders. The brokers are
authorized to designate other intermediaries to accept purchase and redemption
orders on the Fund's behalf. The Fund will be deemed to have received a purchase
or redemption order when an authorized broker, or a broker's authorized
designee, accepts the order in accordance with the Fund's instructions. In most
instances, for these categories of investors, a contract owner's properly
transmitted order will be priced at the Fund's next-determined NAV after the
order is accepted by the authorized broker or the broker's designee. The
contract owner should review the authorized broker's policies relating to
trading in the Vanguard funds.
18
When insurance companies establish omnibus accounts in the Fund for their
clients, we cannot monitor the individual clients' trading activity. However, we
review trading activity at the omnibus account level, and we look for activity
that may indicate potential frequent trading or market-timing. If we detect
suspicious trading activity, we will seek the assistance of the insurance
company to investigate that trading activity and take appropriate action,
including prohibiting additional purchases of Fund shares by a client. Insurance
companies may apply frequent-trading policies that differ from one another.
Please read the insurance company contract and program materials carefully to
learn of any rules or fees that may apply. See the accompanying prospectus for
the annuity or insurance program through which Fund shares are offered for
further details on transaction policies.
We generally post on our website at www.vanguard.com, in the HOLDINGS section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. Please consult the Fund's
Statement of Additional Information or our website for a description of the
policies and procedures that govern disclosure of the Fund's portfolio holdings.
Vanguard, Connect with Vanguard, PlainTalk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. CFA/(R)/ is a trademark owned by CFA
Institute. All other marks are the exclusive property of their respective
owners.
19
GLOSSARY OF INVESTMENT TERMS
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity and are repaid. In general, the longer the average maturity, the more a
fund's share price fluctuates in response to changes in market interest rates.
In calculating average maturity, a fund uses a bond's maturity or, if
applicable, an earlier date on which the advisor believes it is likely that a
maturity-shortening device (such as a call, put, refunding, prepayment or
redemption provision, or an adjustable coupon) will cause the bond to be repaid.
BOND. A debt security (IOU) issued by a corporation, government, or government
agency in exchange for the money you lend it. In most instances, the issuer
agrees to pay back the loan by a specific date and make regular interest
payments until that date.
CAPITAL GAINS DISTRIBUTION. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
CASH INVESTMENTS. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
COUPON. The interest rate paid by the issuer of a debt security until its
maturity. It is expressed as an annual percentage of the face value of the
security.
DIVIDEND DISTRIBUTION. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
FACE VALUE. The amount to be paid at a bond's maturity; also known as the par
value or principal.
FIXED INCOME SECURITY. An investment, such as a bond, representing a debt that
must be repaid by a specified date, and on which the borrower must pay a fixed,
variable, or floating rate of interest.
INCEPTION DATE. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
INFLATION-INDEXED SECURITIES. Bonds issued by the U.S. government, government
agencies, or corporations, whose principal and interest payments--unlike those
of conventional bonds--are adjusted over time to reflect inflation.
20
INVESTMENT-GRADE BOND. A debt security whose credit quality is considered by
independent bond-rating agencies, or through independent analysis conducted by a
fund's advisor, to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Debt securities rated in one of
the four highest rating categories are considered "investment-grade." Other debt
securities may be considered by the advisor to be investment-grade.
MATURITY. The date when a bond issuer agrees to repay the bond's principal, or
face value, to the bond's buyer.
NET ASSET VALUE (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
PRINCIPAL. The face value of a debt instrument or the amount of money put into
an investment.
RETURN OF CAPITAL. A return of all or part of your original investment in the
Fund. In general, return of capital reduces your cost basis in a Fund's shares
and is not taxable to you, but return of capital after your cost basis has been
reduced to zero is taxable as capital gains.
SECURITIES. Stocks, bonds, money market instruments, and other investment
vehicles.
TOTAL RETURN. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
VOLATILITY. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
YIELD. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP LOGO] [VANGUARD/(R)/ LOGO]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
FOR MORE INFORMATION
If you would like more information about Vanguard Inflation-Protected Securities
Fund, the following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual reports or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
Vanguard Annuity and Insurance Services
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-522-5555
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, DC. To find out more about this
public service, call the SEC at 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-4681
(C) 2008 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P119A 042008
PART B
VANGUARD/(R)/ BOND INDEX FUNDS
STATEMENT OF ADDITIONAL INFORMATION
APRIL 25, 2008
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Funds' current prospectuses (dated April 25, 2008). To
obtain, without charge, a prospectus or the most recent Annual Report to
Shareholders, which contains the Funds' financial statements as hereby
incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT:
800-662-7447
TABLE OF CONTENTS
DESCRIPTION OF THE TRUST...............................................B-1
INVESTMENT POLICIES....................................................B-3
INVESTMENT LIMITATIONS................................................B-21
SHARE PRICE...........................................................B-22
PURCHASE AND REDEMPTION OF SHARES.....................................B-22
MANAGEMENT OF THE FUNDS...............................................B-24
INVESTMENT ADVISORY SERVICES..........................................B-36
PORTFOLIO TRANSACTIONS................................................B-38
PROXY VOTING GUIDELINES...............................................B-40
INFORMATION ABOUT THE ETF SHARE CLASS ................................B-44
FINANCIAL STATEMENTS..................................................B-49
DESCRIPTION OF BOND RATINGS...........................................B-49
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DESCRIPTION OF THE TRUST
ORGANIZATION
Vanguard Bond Index Funds (the Trust) was organized as a Maryland corporation in
1986 and was reorganized as a Delaware statutory trust in May 1998. Prior to its
reorganization as a Delaware statutory trust, the Trust was known as Vanguard
Bond Index Fund, Inc. The Trust is registered with the United States Securities
and Exchange Commission (the SEC) under the Investment Company Act of 1940 (the
1940 Act) as an open-end, diversified management investment company. The Trust
currently offers the following funds (and classes thereof):
SHARECLASSES/1/
------------
FUND/2/ INVESTOR ADMIRAL SIGNAL INSTITUTIONAL ETF
---- -------- ------- ------ ------------- ---
Vanguard Total Bond Market Index Fund Yes Yes Yes Yes Yes
Vanguard Short-Term Bond Index Fund Yes Yes Yes No Yes
Vanguard Intermediate-Term Bond Index Fund Yes Yes Yes Yes Yes
Vanguard Long-Term Bond Index Fund Yes No No Yes Yes
Vanguard Inflation-Protected Securities Fund/3/ Yes Yes No Yes No
1 Individually a class; collectively the classes.
2 Individually, a Fund; collectively, the Funds.
3 Prior to November 13, 2007, the Fund was a series of Vanguard Fixed Income
Securities Funds.
|
The Trust has the ability to offer additional funds or classes of shares. There
is no limit on the number of full and fractional shares that may be issued for a
single fund or class of shares.
B-1
Each Fund described in this Statement of Additional Information is a member
fund. There are two types of Vanguard funds, member funds and non-member funds.
Member funds jointly own The Vanguard Group, Inc. (Vanguard), contribute to
Vanguard's capital, and receive services at cost from Vanguard pursuant to a
Funds' Service Agreement. Non-member funds do not contribute to Vanguard's
capital, but they do receive services pursuant to special services agreements.
See "Management of the Funds" for more information.
SERVICE PROVIDERS
CUSTODIAN. JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070,
serves as the Funds' custodian. The custodian is responsible for maintaining the
Funds' assets, keeping all necessary accounts and records of Fund assets, and
appointing any foreign sub-custodians or foreign securities depositories.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP, Two
Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042,
serves as the Funds' independent registered public accounting firm. The
independent registered public accounting firm audits the Funds' annual financial
statements and provides other related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is Vanguard, P.O. Box 2600, Valley Forge, PA 19482.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on
the right of shareholders to retain or dispose of a Fund's shares, other than
those described in the Fund's current prospectus and elsewhere in this Statement
of Additional Information or the possible future termination of the Fund or a
share class. Each Fund or class may be terminated by reorganization into another
mutual fund or class or by liquidation and distribution of the assets of the
Fund or class. Unless terminated by reorganization or liquidation, each Fund and
share class will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a statutory trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. This means that a shareholder of a Fund generally will not
be personally liable for payment of the Fund's debts. Some state courts,
however, may not apply Delaware law on this point. We believe that the
possibility of such a situation arising is remote.
DIVIDEND RIGHTS. The shareholders of each class of a Fund are entitled to
receive any dividends or other distributions declared by the Fund for each such
class. No shares of a Fund have priority or preference over any other shares of
the Fund with respect to distributions. Distributions will be made from the
assets of the Fund and will be paid ratably to all shareholders of a particular
class according to the number of shares of the class held by shareholders on the
record date. The amount of dividends per share may vary between separate share
classes of the Fund based upon differences in the net asset values of the
different classes and differences in the way that expenses are allocated between
share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (1) a
shareholder vote is required under the 1940 Act; (2) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of a Fund or any class; (3) the
trustees determine that it is necessary or desirable to obtain a shareholder
vote; or (4) a certain type of merger or consolidation, share conversion, share
exchange, or sale of assets is proposed. The 1940 Act requires a shareholder
vote under various circumstances, including to elect or remove trustees upon the
written request of shareholders representing 10% or more of a Fund's net assets
and to change any fundamental policy of a Fund. Unless otherwise required by
applicable law, shareholders of a Fund receive one vote for each dollar of net
asset value owned on the record date, and a fractional vote for each fractional
dollar of net asset value owned on the record date. However, only the shares of
the Fund or class affected by a particular matter are entitled to vote on that
matter. In addition, each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to that class, and each class has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of another. Voting rights are
noncumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event that a Fund is liquidated, shareholders will
be entitled to receive a pro rata share of the Fund's net assets. In the event
that a class of shares is liquidated, shareholders of that class will be
entitled to
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receive a pro rata share of the Fund's net assets that are allocated to that
class. Shareholders may receive cash, securities, or a combination of the two.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds'
shares.
CONVERSION RIGHTS. Shareholders of each Fund may convert their shares into
another class of shares of the same Fund upon the satisfaction of any then
applicable eligibility requirements as described in the Fund's current
prospectus. Shareholders may not convert into or out of a Fund's ETF Shares.
REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in its
current prospectus and elsewhere in this Statement of Additional Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUNDS
Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC).
This special tax status means that the Fund will not be liable for federal tax
on income and capital gains distributed to shareholders. In order to preserve
its tax status, each Fund must comply with certain requirements. If a Fund fails
to meet these requirements in any taxable year, it will be subject to tax on its
taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and net long-term
capital gains, will be taxable to shareholders as ordinary income. In addition,
a Fund could be required to recognize unrealized gains, pay substantial taxes
and interest, and make substantial distributions before regaining its tax status
as a regulated investment company.
INVESTMENT POLICIES
Some of the investment policies described below and in each Fund's prospectus
set forth percentage limitations on a Fund's investment in, or holdings of,
certain securities or other assets. Unless otherwise required by law, compliance
with these policies will be determined immediately after the acquisition of such
securities or assets. Subsequent changes in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations.
The following policies and explanations supplement each Fund's investment
objective and policies set forth in the prospectus. With respect to the
different investments discussed below, a Fund may acquire such investments to
the extent consistent with its investment objective and policies.
80% POLICY. Under normal circumstances, each Bond Index Fund invests at least
80% of its assets in bonds that are part of its target index. The
Inflation-Protected Securities Fund invests at least 80% of its assets in
inflation-indexed bonds. In applying these 80% policies, each Fund's assets
include its net assets and borrowings for investment purposes.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that represent
a participation in, or are secured by and payable from, pools of underlying
assets such as debt securities, bank loans, motor vehicle installment sales
contracts, installment loan contracts, leases of various types of real and
personal property, receivables from revolving credit (i.e., credit card)
agreements, and other categories of receivables. These underlying assets are
securitized through the use of trusts and special purpose entities. Payment of
interest and repayment of principal on asset-backed securities may be largely
dependent upon the cash flows generated by the underlying assets backing the
securities and, in certain cases, may be supported by letters of credit, surety
bonds, or other credit enhancements. The rate of principal payments on
asset-backed securities is related to the rate of principal payments, including
prepayments, on the underlying assets. The credit quality of asset-backed
securities depends primarily on the quality of the underlying assets, the level
of credit support, if any, provided for the securities, and the credit quality
of the credit-support provider, if any. The value of asset-backed securities may
be affected by the various factors described above and other factors, such as
changes in interest rates, the availability of information concerning the pool
and its structure, the creditworthiness of the servicing agent for the pool, the
originator of the underlying assets, or the entities providing the credit
enhancement.
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate, as a result of the pass-through of
prepayments of principal on the underlying assets. Prepayments of principal by
borrowers or foreclosure or other enforcement action by creditors shorten the
term of the underlying assets. The occurrence of
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prepayments is a function of several factors, such as the level of interest
rates, general economic conditions, the location and age of the underlying
obligations, and other social and demographic conditions. A fund's ability to
maintain positions in asset-backed securities is affected by the reductions in
the principal amount of the underlying assets because of prepayments. A fund's
ability to reinvest prepayments of principal (as well as interest and other
distributions and sale proceeds) at a comparable yield is subject to generally
prevailing interest rates at that time. The value of asset-backed securities
varies with changes in market interest rates generally and the differentials in
yields among various kinds of U.S. government securities, mortgage-backed
securities, and asset-backed securities. In periods of rising interest rates,
the rate of prepayment tends to decrease, thereby lengthening the average life
of the underlying securities. Conversely, in periods of falling interest rates,
the rate of prepayment tends to increase, thereby shortening the average life of
such assets. Because prepayments of principal generally occur when interest
rates are declining, an investor, such as a fund, generally has to reinvest the
proceeds of such prepayments at lower interest rates than those at which the
assets were previously invested. Therefore, asset-backed securities have less
potential for capital appreciation in periods of falling interest rates than
other income-bearing securities of comparable maturity.
Because asset-backed securities generally do not have the benefit of a security
interest in the underlying assets that is comparable to a mortgage, asset-backed
securities present certain additional risks that are not present with
mortgage-backed securities. For example, revolving credit receivables are
generally unsecured and the debtors on such receivables are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give debtors the right to set-off certain amounts owed, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles,
rather than by real property. Most issuers of automobile receivables permit loan
servicers to retain possession of the underlying assets. If the servicer of a
pool of underlying assets sells them to another party, there is the risk that
the purchaser could acquire an interest superior to that of holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issue of asset-backed securities and technical
requirements under state law, the trustee for the holders of the automobile
receivables may not have a proper security interest in the automobiles.
Therefore, there is the possibility that recoveries on repossessed collateral
may not be available to support payments on these securities.
BORROWING. A fund's ability to borrow money is limited by its investment
policies and limitations, by the 1940 Act, and by applicable exemptions,
no-action letters, interpretations, and other pronouncements issued from time to
time by the SEC and its staff or any other regulatory authority with
jurisdiction. Under the 1940 Act, a fund is required to maintain continuous
asset coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) of 300% of the amount borrowed, with an exception for
borrowings not in excess of 5% of the fund's total assets made for temporary or
emergency purposes. Any borrowings for temporary purposes in excess of 5% of the
fund's total assets must maintain continuous asset coverage. If the 300% asset
coverage should decline as a result of market fluctuations or for other reasons,
a fund may be required to sell some of its portfolio holdings within three days
(excluding Sundays and holidays) to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time.
Borrowing will tend to exaggerate the effect on net asset value of any increase
or decrease in the market value of a fund's portfolio. Money borrowed will be
subject to interest costs that may or may not be recovered by earnings on the
securities purchased. A fund also may be required to maintain minimum average
balances in connection with a borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost
of borrowing over the stated interest rate.
The SEC takes the position that other transactions that have a leveraging
effect on the capital structure of a fund or are economically equivalent to
borrowing can be viewed as constituting a form of borrowing by the fund for
purposes of the 1940 Act. These transactions can include entering into reverse
repurchase agreements, engaging in mortgage-dollar-roll transactions, selling
securities short (other than short sales "against-the-box"), buying and selling
certain derivatives (such as futures contracts), selling (or writing) put and
call options, engaging in sale-buybacks, entering into firm-commitment and
standby-commitment agreements, engaging in when-issued, delayed-delivery, or
forward-commitment transactions, and other trading practices that have a
leveraging effect on the capital structure of a fund or are economically
equivalent to borrowing (additional discussion about a number of these
transactions can be found below). A borrowing transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and therefore such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund (1) maintains an offsetting
financial position; (2) segregates liquid assets (with such liquidity determined
by the advisor in accordance with procedures established by the board of
trustees) equal (as determined on a daily mark-to-market basis) in value to the
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fund's potential economic exposure under the borrowing transaction; or (3)
otherwise "covers" the transaction in accordance with applicable SEC guidance
(collectively, "covers" the transaction). A fund may have to buy or sell a
security at a disadvantageous time or price in order to cover a borrowing
transaction. In addition, segregated assets may not be available to satisfy
redemptions or for other purposes.
DEBT SECURITIES. A debt security, sometimes called a fixed income security, is
a security consisting of a certificate or other evidence of a debt (secured or
unsecured) on which the issuing company or governmental body promises to pay the
holder thereof a fixed, variable, or floating rate of interest for a specified
length of time, and to repay the debt on the specified maturity date. Some debt
securities, such as zero coupon bonds, do not make regular interest payments but
are issued at a discount to their principal or maturity value. Debt securities
include a variety of fixed income obligations, including, but not limited to,
corporate bonds, government securities, municipal securities, convertible
securities, mortgage-backed securities, and asset-backed securities. Debt
securities include investment-grade securities, non-investment-grade securities,
and unrated securities. Debt securities are subject to a variety of risks, such
as interest rate risk, income risk, call/prepayment risk, inflation risk, credit
risk, and (in the case of foreign securities) country risk and currency risk.
The reorganization of an issuer under the federal bankruptcy laws may result in
the issuer's debt securities being cancelled without repayment, repaid only in
part, or repaid in part or in whole through an exchange thereof for any
combination of cash, debt securities, convertible securities, equity securities,
or other instruments or rights in respect of the same issuer or a related
entity.
DEBT SECURITIES -- BANK OBLIGATIONS. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations of
commercial banks. Variable rate certificates of deposit are certificates of
deposit on which the interest rate is periodically adjusted prior to their
stated maturity based upon a specified market rate. As a result of these
adjustments, the interest rate on these obligations may be increased or
decreased periodically. Frequently, dealers selling variable rate certificates
of deposit to a fund will agree to repurchase such instruments, at the fund's
option, at par on or near the coupon dates. The dealers' obligations to
repurchase these instruments are subject to conditions imposed by various
dealers; such conditions typically are the continued credit standing of the
issuer and the existence of reasonably orderly market conditions. A fund is also
able to sell variable rate certificates of deposit on the secondary market.
Variable rate certificates of deposit normally carry a higher interest rate than
comparable fixed-rate certificates of deposit. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower usually in connection with an
international commercial transaction (to finance the import, export, transfer,
or storage of goods). The borrower is liable for payment as well as the bank,
which unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in the secondary markets prior to maturity.
DEBT SECURITIES -- COMMERCIAL PAPER. Commercial paper refers to short-term,
unsecured promissory notes issued by corporations to finance short-term credit
needs, is usually sold on a discount basis, and has a maturity at the time of
issuance not exceeding nine months. Commercial paper rated A-1 by Standard &
Poor's has the following characteristics: (1) liquidity ratios are adequate to
meet cash requirements; (2) long-term senior debt is rated "A" or better; (3)
the issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances; (5) typically, the issuer's industry is well established
and the issuer has a strong position within the industry; and (6) the
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is A-1, A-2, or A-3. The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and the appraisal of
speculative-type risks that may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by the management
of obligations that may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangement between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes. Because variable amount master demand
notes are direct lending arrangements between a lender and a borrower, it is not
generally contemplated that such instruments will be traded, and there is no
secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued
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interest, at any time. In connection with a fund's investment in variable amount
master demand notes, Vanguard's investment management staff will monitor, on an
ongoing basis, the earning power, cash flow and other liquidity ratios of the
issuer, and the borrower's ability to pay principal and interest on demand.
DEBT SECURITIES -- INFLATION-INDEXED SECURITIES. Inflation-indexed securities
are debt securities the principal value of which is periodically adjusted to
reflect the rate of inflation as indicated by the Consumer Price Index (CPI).
Inflation-indexed securities may be issued by the U.S. government, agencies and
instrumentalities of the U.S. government, and by corporations. Two structures
are common. The U.S. Treasury and some other issuers use a structure that
accrues inflation into the principal value of the bond. Most other issuers pay
out the CPI accruals as part of a semiannual coupon.
The periodic adjustment of U.S. inflation-indexed securities is tied to the
CPI, which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI
is a measurement of changes in the cost of living, made up of components such as
housing, food, transportation, and energy. Inflation-indexed securities issued
by a foreign government are generally adjusted to reflect a comparable inflation
index, calculated by that government. There can be no assurance that the CPI or
any foreign inflation index will accurately measure the real rate of inflation
in the prices of goods and services. Moreover, there can be no assurance that
the rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Inflation--a general rise in prices of goods and services--erodes the
purchasing power of an investor's portfolio. For example, if an investment
provides a "nominal" total return of 5% in a given year and inflation is 2%
during that period, the inflation-adjusted, or real, return is 3%. Inflation, as
measured by the CPI, has occurred in each of the past 50 years, so investors
should be conscious of both the nominal and real returns of their investments.
Investors in inflation-indexed securities funds who do not reinvest the portion
of the income distribution that is attributable to inflation adjustments will
not maintain the purchasing power of the investment over the long term. This is
because interest earned depends on the amount of principal invested, and that
principal will not grow with inflation if the investor fails to reinvest the
principal adjustment paid out as part of a fund's income distributions. While
inflation-indexed securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
If the periodic adjustment rate measuring inflation (i.e., the CPI) falls, the
principal value of inflation-indexed securities will be adjusted downward, and
consequently the interest payable on these securities (calculated with respect
to a smaller principal amount) will be reduced. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed in the case of
U.S. Treasury inflation-indexed securities, even during a period of deflation.
However, the current market value of the inflation-indexed securities is not
guaranteed, and will fluctuate. Other inflation-indexed securities include
inflation-related bonds, which may or may not provide a similar guarantee. If a
guarantee of principal is not provided, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
The value of inflation-indexed securities should change in response to changes
in real interest rates. Real interest rates in turn are tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of
inflation-indexed securities. In contrast, if nominal interest rates increased
at a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed securities.
Any increase in principal for an inflation-indexed security resulting from
inflation adjustments is considered by Internal Revenue Service (IRS)
regulations to be taxable income in the year it occurs. For direct holders of an
inflation-indexed security, this means that taxes must be paid on principal
adjustments even though these amounts are not received until the bond matures.
By contrast, a fund holding these securities distributes both interest income
and the income attributable to principal adjustments each quarter in the form of
cash or reinvested shares (which, like principal adjustments, are taxable to
shareholders).
DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade
securities, also referred to as "high-yield securities" or "junk bonds," are
debt securities that are rated lower than the four highest rating categories by
a nationally recognized statistical rating organization (for example, lower than
Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's)
or are determined to be of comparable quality by the fund's advisor. These
securities are generally considered to be, on balance, predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk than
securities in the investment-grade categories. Investment in these securities
generally provides greater income and
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increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk.
Analysis of the creditworthiness of issuers of high-yield securities may be
more complex than for issuers of investment-grade securities. Thus, reliance on
credit ratings in making investment decisions entails greater risks for
high-yield securities than for investment-grade debt securities. The success of
a fund's advisor in managing high-yield securities is more dependent upon its
own credit analysis than is the case with investment-grade securities.
Some high-yield securities are issued by smaller, less-seasoned companies,
while others are issued as part of a corporate restructuring, such as an
acquisition, merger, or leveraged buyout. Companies that issue high-yield
securities are often highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with
investment-grade securities. Some high-yield securities were once rated as
investment-grade but have been downgraded to junk bond status because of
financial difficulties experienced by their issuers.
The market values of high-yield securities tend to reflect individual issuer
developments to a greater extent than do investment-grade securities, which in
general react to fluctuations in the general level of interest rates. High-yield
securities also tend to be more sensitive to economic conditions than are
investment-grade securities. A projection of an economic downturn or of a
sustained period of rising interest rates, for example, could cause a decline in
junk bond prices because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If an issuer of high-yield securities defaults, in addition to
risking payment of all or a portion of interest and principal, a fund investing
in such securities may incur additional expenses to seek recovery.
The secondary market on which high-yield securities are traded may be less
liquid than the market for investment-grade securities. Less liquidity in the
secondary trading market could adversely affect the ability of a fund to sell a
high-yield security or the price at which a fund could sell a high-yield
security, and could adversely affect the daily net asset value of fund shares.
When secondary markets for high-yield securities are less liquid than the market
for investment-grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available.
Except as otherwise provided in a fund's prospectus, if a credit-rating agency
changes the rating of a portfolio security held by a fund, the fund may retain
the portfolio security if the advisor deems it in the best interests of
shareholders.
DEBT SECURITIES -- STRUCTURED AND INDEXED SECURITIES. Structured securities
(also called "structured notes") and indexed securities are derivative debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by an unrelated indicator. The value of the principal of and/or
interest on structured and indexed securities is determined by reference to
changes in the value of a specific asset, reference rate, or index (the
reference) or the relative change in two or more references. The interest rate
or the principal amount payable upon maturity or redemption may be increased or
decreased, depending upon changes in the applicable reference. The terms of the
structured and indexed securities may provide that in certain circumstances no
principal is due at maturity and, therefore, may result in a loss of invested
capital. Structured and indexed securities may be positively or negatively
indexed, so that appreciation of the reference may produce an increase or a
decrease in the interest rate or value of the security at maturity. In addition,
changes in the interest rate or the value of the structured or indexed security
at maturity may be calculated as a specified multiple of the change in the value
of the reference; therefore, the value of such security may be very volatile.
Structured and indexed securities may entail a greater degree of market risk
than other types of debt securities because the investor bears the risk of the
reference. Structured or indexed securities may also be more volatile, less
liquid, and more difficult to accurately price than less complex securities or
more traditional debt securities.
DEBT SECURITIES -- U.S. GOVERNMENT SECURITIES. The term "U.S. Government
Securities" refers to a variety of debt securities that are issued or guaranteed
by the U.S. Treasury, by various agencies of the U.S. government, and by various
instrumentalities that have been established or sponsored by the U.S.
government. The term also refers to repurchase agreements collateralized by such
securities.
U.S. Treasury securities are backed by the full faith and credit of the U.S.
government. Other types of securities issued or guaranteed by Federal agencies
and U.S. government-sponsored instrumentalities may or may not be backed by the
full faith and credit of the U.S. government. The U.S. government, however, does
not guarantee the market price of any U.S. government securities. In the case of
securities not backed by the full faith and credit of the U.S. government, the
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investor must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the United States itself in the event the agency or
instrumentality does not meet its commitment.
Some of the U.S. government agencies that issue or guarantee securities include
the Government National Mortgage Association, the Export-Import Bank of the
United States, the Farmers Home Administration, the Federal Housing
Administration, the Maritime Administration, the Small Business Administration,
and the Tennessee Valley Authority. An instrumentality of the U.S. government is
a government agency organized under Federal charter with government supervision.
Instrumentalities issuing or guaranteeing securities include, among others, the
Federal Home Loan Banks and the Federal National Mortgage Association.
DEBT SECURITIES -- VARIABLE AND FLOATING RATE SECURITIES. Variable and floating
rate securities are debt securities that provide for periodic adjustments in the
interest rate paid on the security. Variable rate securities provide for a
specified periodic adjustment in the interest rate, while floating rate
securities have interest rates that change whenever there is a change in a
designated benchmark rate or the issuer's credit quality. There is a risk that
the current interest rate on variable and floating rate securities may not
accurately reflect current market interest rates or adequately compensate the
holder for the current creditworthiness of the issuer. Some variable or floating
rate securities are structured with liquidity features such as (1) put options
or tender options that permit holders (sometimes subject to conditions) to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries or (2) auction rate features,
remarketing provisions, or other maturity-shortening devices designed to enable
the issuer to refinance or redeem outstanding debt securities (market-dependent
liquidity features). Variable or floating rate securities that include
market-dependent liquidity features may have greater liquidity risk than other
securities, due to (for example) the failure of a market-dependent liquidity
feature to operate as intended (as a result of the issuer's declining
creditworthiness, adverse market conditions, or other factors) or the inability
or unwillingness of a participating broker-dealer to make a secondary market for
such securities. As a result, variable or floating rate securities that include
market-dependent liquidity features may lose value and the holders of such
securities may be required to retain them until the later of the repurchase
date, the resale date, or maturity. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
DEBT SECURITIES -- ZERO-COUPON AND PAY-IN-KIND SECURITIES. Zero-coupon and
pay-in-kind securities are debt securities that do not make regular cash
interest payments. Zero-coupon securities generally do not pay interest.
Pay-in-kind securities pay interest through the issuance of additional
securities. These securities are generally issued at a discount to their
principal or maturity value. Because such securities do not pay current cash
income, the price of these securities can be volatile when interest rates
fluctuate. Although these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon and pay-in-kind securities to
include in income each year the portion of the original issue discount and other
non-cash income on such securities accrued during that year. Each fund that
holds such securities intends to pass along such interest as a component of the
fund's distributions of net investment income.
DERIVATIVES. A derivative is a financial instrument that has a value that is
based on--or "derived from"--the values of other assets, reference rates, or
indexes. Derivatives may relate to a wide variety of underlying references, such
as commodities, stocks, bonds, interest rates, currency exchange rates, and
related indexes. Derivatives include futures contracts and options on futures
contracts, forward-commitment transactions, options on securities, caps, floors,
collars, swap agreements, and other financial instruments. Some derivatives,
such as futures contracts and certain options, are traded on U.S. commodity and
securities exchanges, while other derivatives, such as swap agreements, are
privately negotiated and entered into in the over-the-counter (OTC) market. The
risks associated with the use of derivatives are different from, and possibly
greater than, the risks associated with investing directly in the securities,
assets, or market indexes on which the derivatives are based. Derivatives are
used by some investors for speculative purposes. Derivatives also may be used
for a variety of purposes that do not constitute speculation, such as hedging,
risk management, seeking to stay fully invested, seeking to reduce transaction
costs, seeking to simulate an investment in equity or debt securities or other
investments, seeking to add value by using derivatives to more efficiently
implement portfolio positions when derivatives are favorably priced relative to
equity or debt securities or other investments, and for other purposes. There is
no assurance that any derivatives strategy used by a fund's advisor will
succeed. The counterparties to the funds' derivatives will not be considered the
issuers thereof for purposes of certain provisions of the 1940 Act and the IRC,
although such derivatives may qualify as securities or investments under such
laws. The funds' advisors, however, will monitor and adjust, as appropriate, the
funds' credit risk exposure to derivative counterparties.
B-8
Derivative products are highly specialized instruments that require investment
techniques and risk analyses different from those associated with stocks, bonds,
and other traditional investments. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions.
The use of derivatives generally involves the risk that a loss may be sustained
as a result of the insolvency or bankruptcy of the other party to the contract
(usually referred to as a "counterparty") or the failure of the counterparty to
make required payments or otherwise comply with the terms of the contract.
Additionally, the use of credit derivatives can result in losses if a fund's
advisor does not correctly evaluate the creditworthiness of the issuer on which
the credit derivative is based.
Derivatives may be subject to liquidity risk, which exists when a particular
derivative is difficult to purchase or sell. If a derivative transaction is
particularly large or if the relevant market is illiquid (as is the case with
many OTC derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price.
Derivatives may be subject to pricing or "basis" risk, which exists when a
particular derivative becomes extraordinarily expensive relative to historical
prices or the prices of corresponding cash market instruments. Under certain
market conditions, it may not be economically feasible to initiate a transaction
or liquidate a position in time to avoid a loss or take advantage of an
opportunity.
Because many derivatives have a leverage component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the derivative itself.
Certain derivatives have the potential for unlimited loss, regardless of the
size of the initial investment. A derivative transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and therefore such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements described under the heading "Borrowing."
Like most other investments, derivative instruments are subject to the risk
that the market value of the instrument will change in a way detrimental to a
fund's interest. A fund bears the risk that its advisor will incorrectly
forecast future market trends or the values of assets, reference rates, indexes,
or other financial or economic factors in establishing derivative positions for
the fund. If the advisor attempts to use a derivative as a hedge against, or as
a substitute for, a portfolio investment, the fund will be exposed to the risk
that the derivative will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the fund.
Although hedging strategies involving derivative instruments can reduce the risk
of loss, they can also reduce the opportunity for gain or even result in losses
by offsetting favorable price movements in other fund investments. Many
derivatives, in particular OTC derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a fund.
EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds
(ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund
would purchase ETF shares for the same reason it would purchase (and as an
alternative to purchasing) futures contracts: to obtain exposure to all or a
portion of the stock or bond market. ETF shares enjoy several advantages over
futures. Depending on the market, the holding period, and other factors, ETF
shares can be less costly and more tax-efficient than futures. In addition, ETF
shares can be purchased for smaller sums, offer exposure to market sectors and
styles for which there is no suitable or liquid futures contract, and do not
involve leverage.
An investment in an ETF generally presents the same primary risks as an
investment in a conventional fund (i.e., one that is not exchange traded) that
has the same investment objective, strategies, and policies. The price of an ETF
can fluctuate within a wide range, and a fund could lose money investing in an
ETF if the prices of the securities owned by the ETF go down. In addition, ETFs
are subject to the following risks that do not apply to conventional funds: (1)
the market price of the ETF's shares may trade at a discount to their net asset
value; (2) an active trading market for an ETF's shares may not develop or be
maintained; or (3) trading of an ETF's shares may be halted if the listing
exchange's officials deem such action appropriate, the shares are de-listed from
the exchange, or the activation of market-wide "circuit breakers" (which are
tied to large decreases in stock prices) halts stock trading generally.
Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares
generally are subject to the limitations on, and the risks of, a fund's
investments in other investment companies, which are described under the heading
"Other Investment Companies."
B-9
Vanguard ETF(TM) *Shares are exchange-traded shares that represent an interest
in an investment portfolio held by Vanguard funds. A fund's investments in
Vanguard ETF Shares are also generally subject to the descriptions, limitations,
and risks described under the heading "Other Investment Companies, " except as
provided by an exemption granted by the SEC that permits registered investment
companies to invest in a Vanguard fund that issues ETF Shares beyond the limits
of Section 12(d)(1) of the 1940 Act, subject to certain terms and conditions.
* U.S. Pat. No. 6,879,964 B2; 7,337,138.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts and
options on futures contracts are derivatives. A futures contract is a
standardized agreement between two parties to buy or sell at a specific time in
the future a specific quantity of a commodity at a specific price. The commodity
may consist of an asset, a reference rate, or an index. A security futures
contract relates to the sale of a specific quantity of shares of a single equity
security or a narrow-based securities index. The value of a futures contract
tends to increase and decrease in tandem with the value of the underlying
commodity. The buyer of a futures contract enters into an agreement to purchase
the underlying commodity on the settlement date and is said to be "long" the
contract. The seller of a futures contract enters into an agreement to sell the
underlying commodity on the settlement date and is said to be "short" the
contract. The price at which a futures contract is entered into is established
either in the electronic marketplace or by open outcry on the floor of an
exchange between exchange members acting as traders or brokers. Open futures
contracts can be liquidated or closed out by physical delivery of the underlying
commodity or payment of the cash settlement amount on the settlement date,
depending on the terms of the particular contract. Some financial futures
contracts (such as security futures) provide for physical settlement at
maturity. Other financial futures contracts (such as those relating to interest
rates, foreign currencies, and broad-based securities indexes) generally provide
for cash settlement at maturity. In the case of cash settled futures contracts,
the cash settlement amount is equal to the difference between the final
settlement price on the last trading day of the contract and the price at which
the contract was entered into. Most futures contracts, however, are not held
until maturity but instead are "offset" before the settlement date through the
establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay
for the underlying commodity unless the contract is held until the settlement
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures commission merchant (FCM) when the futures contract is
entered into. Initial margin deposits are typically calculated as a percentage
of the contract's market value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. This process is known
as "marking-to-market." A futures transaction will not be considered to
constitute the issuance of a "senior security" by a fund for purposes of the
1940 Act, and such transaction will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by a fund, if the fund covers the
transaction in accordance with the requirements described under the heading
"Borrowing."
An option on a futures contract (or futures option) conveys the right, but not
the obligation, to purchase (in the case of a call option) or sell (in the case
of a put option) a specific futures contract at a specific price (called the
"exercise" or "strike" price) any time before the option expires. The seller of
an option is called an option writer. The purchase price of an option is called
the premium. The potential loss to an option buyer is limited to the amount of
the premium plus transaction costs. This will be the case, for example, if the
option is held and not exercised prior to its expiration date. Generally, an
option writer sells options with the goal of obtaining the premium paid by the
option buyer. If an option sold by an option writer expires without being
exercised, the writer retains the full amount of the premium. The option writer,
however, has unlimited economic risk because its potential loss, except to the
extent offset by the premium received when the option was written, is equal to
the amount the option is "in-the-money" at the expiration date. A call option is
in-the-money if the value of the underlying futures contract exceeds the
exercise price of the option. A put option is in-the-money if the exercise price
of the option exceeds the value of the underlying futures contract. Generally,
any profit realized by an option buyer represents a loss for the option writer.
A fund that takes the position of a writer of a futures option is required to
deposit and maintain initial and variation margin with respect to the option, as
described above in the case of futures contracts. A futures option transaction
will not be considered to constitute the issuance of a "senior security" by a
fund for purposes of the 1940 Act, and such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements
described under the heading "Borrowing."
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Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading
Commission, under which a mutual fund is conditionally excluded from the
definition of the term "commodity pool operator." A fund will only enter into
futures contracts and futures options that are standardized and traded on a U.S.
or foreign exchange, board of trade, or similar entity, or quoted on an
automated quotation system.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss
in trading futures contracts and in writing futures options can be substantial,
because of the low margin deposits required, the extremely high degree of
leverage involved in futures and options pricing, and the potential high
volatility of the futures markets. As a result, a relatively small price
movement in a futures position may result in immediate and substantial loss (or
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, and the writing of a futures option, may result in
losses in excess of the amount invested in the position. In the event of adverse
price movements, a fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements (and segregation requirements, if applicable) at a time when it may
be disadvantageous to do so. In addition, on the settlement date, a fund may be
required to make delivery of the instruments underlying the futures positions it
holds.
A fund could suffer losses if it is unable to close out a futures contract or a
futures option because of an illiquid secondary market. Futures contracts and
futures options may be closed out only on an exchange that provides a secondary
market for such products. However, there can be no assurance that a liquid
secondary market will exist for any particular futures product at any specific
time. Thus, it may not be possible to close a futures or option position.
Moreover, most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses. The inability to close futures and
options positions also could have an adverse impact on the ability to hedge a
portfolio investment or to establish a substitute for a portfolio investment.
Treasury futures are generally not subject to such daily limits.
A fund bears the risk that its advisor will incorrectly predict future market
trends. If the advisor attempts to use a futures contract or a futures option as
a hedge against, or as a substitute for, a portfolio investment, the fund will
be exposed to the risk that the futures position will have or will develop
imperfect or no correlation with the portfolio investment. This could cause
substantial losses for the fund. Although hedging strategies involving futures
products can reduce the risk of loss, they can also reduce the opportunity for
gain or even result in losses by offsetting favorable price movements in other
fund investments.
A fund could lose margin payments it has deposited with its FCM, if, for
example, the FCM breaches its agreement with the fund or becomes insolvent or
goes into bankruptcy. In that event, the fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the fund.
HYBRID INSTRUMENT. A hybrid instrument, or hybrid, is an interest in an issuer
that combines the characteristics of an equity security, a debt security, a
commodity, and/or a derivative. A hybrid may have characteristics that, on the
whole, more strongly suggest the existence of a bond, stock or other traditional
investment, but may also have prominent features that are normally associated
with a different type of investment. Moreover, hybrid instruments may be treated
as a particular type of investment for one regulatory purpose (such as taxation)
and may be simultaneously treated as a different type of investment for a
different regulatory purpose (such as securities or commodity regulation).
Hybrids can be used as an efficient means of pursuing a variety of investment
goals, including increased total return, duration management, and currency
hedging. Because hybrids combine features of two or more traditional
investments, and may involve the use of innovative structures, hybrids present
risks that may be similar to, different from, or greater than those associated
with traditional investments with similar characteristics.
B-11
Examples of hybrid instruments include convertible securities, which combine
the investment characteristics of bonds and common stocks, and perpetual bonds,
which are structured like fixed income securities, have no maturity date, and
may be characterized as debt or equity for certain regulatory purposes. Another
example of a hybrid is a commodity-linked bond, such as a bond issued by an oil
company that pays a small base level of interest with additional interest that
accrues in correlation to the extent to which oil prices exceed a certain
predetermined level. Such a hybrid would be a combination of a bond and a call
option on oil.
In the case of hybrids that are structured like fixed income securities (such
as structured notes), the principal amount or interest rate is generally tied
(positively or negatively) to the price of some commodity, currency, securities
index, interest rate, or other economic factor (each a benchmark). For some
hybrids, the principal amount payable at maturity or interest rate may be
increased or decreased, depending on changes in the value of the benchmark.
Other hybrids do not bear interest or pay dividends. The value of a hybrid or
its interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as
commodity shortages and currency devaluations, which cannot be readily foreseen
by the purchaser of a hybrid. Under certain conditions, the redemption value of
a hybrid could be zero. Thus, an investment in a hybrid may entail significant
market risks that are not associated with a similar investment in a traditional,
U.S. dollar-denominated bond with a fixed principal amount that pays a fixed
rate or floating rate of interest. The purchase of hybrids also exposes a fund
to the credit risk of the issuer of the hybrids. Depending on the level of a
fund's investment in hybrids, these risks may cause significant fluctuations in
the fund's net asset value.
Certain issuers of hybrid instruments known as structured products may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
funds' investments in these products may be subject to limits described under
the heading "Other Investment Companies."
INTERFUND BORROWING AND LENDING. The SEC has granted an exemption permitting
the Vanguard funds to participate in Vanguard's interfund lending program. This
program allows the Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes. The program is subject to a number of
conditions, including, among other things, the requirement that: (1) no fund may
borrow or lend money through the program unless it receives a more favorable
interest rate than is typically available from a bank for a comparable
transaction; (2) no equity, taxable bond, or money market fund may loan money if
the loan would cause its aggregate outstanding loans through the program to
exceed 5%, 7.5%, or 10%, respectively, of its net assets at the time of the
loan; and (3) a fund's interfund loans to any one fund shall not exceed 5% of
the lending fund's net assets. In addition, a Vanguard fund may participate in
the program only if and to the extent that such participation is consistent with
the fund's investment objective and investment policies. The boards of trustees
of the Vanguard funds are responsible for overseeing the interfund lending
program. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
LOAN INTERESTS AND DIRECT DEBT INSTRUMENTS. Loan interests and direct debt
instruments are interests in amounts owed by a corporate, governmental, or other
borrower to lenders or lending syndicates (in the case of loans and loan
participations), to suppliers of goods or services (in the case of trade claims
or other receivables), or to other parties. These investments involve a risk of
loss in case of the default, insolvency, or bankruptcy of the borrower and may
offer less legal protection to the purchaser in the event of fraud or
misrepresentation, or there may be a requirement that a purchaser supply
additional cash to a borrower on demand.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of interest and repayment
of principal. If scheduled interest or principal payments are not made, or are
not made in a timely manner, the value of the instrument may be adversely
affected. Loans that are fully secured provide more protections than unsecured
loans in the event of failure to make scheduled interest or principal payments.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral could be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks and may be highly speculative. Borrowers that are in
bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries also involves a risk that the governmental entities responsible for
the repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks. For example, if a
loan is foreclosed, the purchaser could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is at least conceivable
B-12
that under emerging legal theories of lender liability, a purchaser could be
held liable as a co-lender. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediary.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless the purchaser has direct recourse
against the borrower, the purchaser may have to rely on the agent to apply
appropriate credit remedies against a borrower under the terms of the loan or
other indebtedness. If assets held by the agent for the benefit of a purchaser
were determined to be subject to the claims of the agent's general creditors,
the purchaser might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or interest.
Direct indebtedness may include letters of credit, revolving credit facilities,
or other standby financing commitments that obligate purchasers to make
additional cash payments on demand. These commitments may have the effect of
requiring a purchaser to increase its investment in a borrower at a time when it
would not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid.
A fund's investment policies will govern the amount of total assets that it may
invest in any one issuer or in issuers within the same industry. For purposes of
these limitations, a fund generally will treat the borrower as the "issuer" of
indebtedness held by the fund. In the case of loan participations where a bank
or other lending institution serves as financial intermediary between a fund and
the borrower, if the participation does not shift to the fund the direct
debtor-creditor relationship with the borrower, SEC interpretations require the
fund, in some circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for purposes of the fund's investment
policies. Treating a financial intermediary as an issuer of indebtedness may
restrict a fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
MORTGAGE DOLLAR ROLLS. A mortgage dollar roll is a transaction in which a fund
sells a mortgage-backed security to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the future at a
pre-determined price. A mortgage-dollar-roll program may be structured to
simulate an investment in mortgage-backed securities at a potentially lower
cost, or with potentially reduced administrative burdens, than directly holding
mortgage-backed securities. A mortgage dollar roll can be viewed, like a reverse
repurchase agreement, as a collateralized borrowing in which a fund pledges a
mortgage-backed security to a dealer to obtain cash. Unlike the dealer of
reverse repurchase agreements, the dealer with which a fund enters into a
mortgage-dollar-roll transaction is not obligated to return the same securities
as those originally sold by the fund, but rather only securities that are
"substantially identical." To be considered substantially identical, the
securities returned to a fund generally must: (1) be collateralized by the same
types of underlying mortgages; (2) be issued by the same agency and be part of
the same program; (3) have similar original stated maturities; (4) have
identical net coupon rates; (5) have similar market yields (and therefore
prices); and (6) satisfy "good delivery" requirements, meaning that the
aggregate principal amounts of the securities delivered and received back must
be within a certain percentage of the initial amount delivered. A mortgage
dollar roll may be considered to constitute a borrowing transaction. A
mortgage-dollar-roll transaction will not be considered to constitute the
issuance of a "senior security" by a fund for purposes of the 1940 Act, and such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements described under the heading "Borrowing."
Mortgage dollar rolls will be used only if consistent with a fund's investment
objective and strategies and will not be used to leverage a fund's assets or
change its risk profile. The proceeds of mortgage-dollar-roll transactions will
be invested in high-quality, short-term fixed income securities.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
represent direct or indirect participation in, or are collateralized by and
payable from, mortgage loans secured by real property or instruments derived
from such loans. Mortgage-backed securities include various types of securities
such as government stripped mortgage-backed securities, adjustable rate
mortgage-backed securities, and collateralized mortgage obligations.
Generally, mortgage-backed securities represent interests in pools of mortgage
loans assembled for sale to investors by various governmental agencies, such as
the Government National Mortgage Association (GNMA), by government-related
organizations, such as the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC), as well as by private issuers,
such as commercial banks, savings and loan institutions, and mortgage bankers.
The average maturity of pass-through pools of mortgage-backed securities in
which a fund may invest varies with the maturities of the underlying mortgage
instruments. In addition, a pool's average maturity may be shortened by
unscheduled payments on the underlying mortgages. Factors affecting mortgage
prepayments include the
B-13
level of interest rates, general economic and social conditions, the location of
the mortgaged property, and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, the average life of a particular pool
cannot be predicted accurately.
Mortgage-backed securities may be classified as private, government, or
government-related, depending on the issuer or guarantor. Private
mortgage-backed securities represent interest in pass-through pools consisting
principally of conventional residential mortgage loans created by non-government
issuers, such as commercial banks and savings and loan associations and private
mortgage insurance companies. Government mortgage-backed securities are backed
by the full faith and credit of the U.S. government. GNMA, the principal U.S.
guarantor of these securities, is a wholly-owned U.S. government corporation
within the Department of Housing and Urban Development. Government-related
mortgage-backed securities are not backed by the full faith and credit of the
U.S. government. Issuers include FNMA and FHLMC. FNMA is a congressionally
chartered corporation owned entirely by private stockholders, and is subject to
general regulation by the Secretary of Housing and Urban Development.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA. FHLMC is a stockholder-owned
government-sponsored enterprise established by Congress. Participation
certificates representing interests in mortgages from FHLMC's national portfolio
are guaranteed as to the timely payment of interest and principal by FHLMC.
Private, government, or government-related entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may be shorter than customary.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. Prepayments of principal by
mortgagors or mortgage foreclosures shorten the term of the mortgage pool
underlying the mortgage-backed security. A fund's ability to maintain positions
in mortgage-backed securities is affected by the reductions in the principal
amount of such securities resulting from prepayments. A fund's ability to
reinvest prepayments of principal at comparable yield is subject to generally
prevailing interest rates at that time. The values of mortgage-backed securities
vary with changes in market interest rates generally and the differentials in
yields among various kinds of U.S. government securities, mortgage-backed
securities, and asset-backed securities. In periods of rising interest rates,
the rate of prepayment tends to decrease, thereby lengthening the average life
of a pool of mortgages supporting a mortgage-backed security. Conversely, in
periods of falling interest rates, the rate of prepayment tends to increase
thereby shortening the average life of such a pool. Because prepayments of
principal generally occur when interest rates are declining, an investor, such
as a fund, generally has to reinvest the proceeds of such prepayments at lower
interest rates than those at which its assets were previously invested.
Therefore, mortgage-backed securities have less potential for capital
appreciation in periods of falling interest rates than other income-bearing
securities of comparable maturity.
MORTGAGE-BACKED SECURITIES -- ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES.
Adjustable rate mortgage-backed securities (ARMBSs) have interest rates that
reset at periodic intervals. Acquiring ARMBSs permits a fund to participate in
increases in prevailing current interest rates through periodic adjustments in
the coupons of mortgages underlying the pool on which ARMBSs are based. Such
ARMBSs generally have higher current yield and lower price fluctuations than is
the case with more traditional fixed income debt securities of comparable rating
and maturity. In addition, when prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, a fund can
reinvest the proceeds of such prepayments at rates higher than those at which
they were previously invested. Mortgages underlying most ARMBSs, however, have
limits on the allowable annual or lifetime increases that can be made in the
interest rate that the mortgagor pays. Therefore, if current interest rates rise
above such limits over the period of the limitation, a fund holding an ARMBS
does not benefit from further increases in interest rates. Moreover, when
interest rates are in excess of coupon rates (i.e., the rates being paid by
mortgagors) of the mortgages, ARMBSs behave more like fixed income securities
and less like adjustable rate securities and are subject to the risks associated
with fixed income securities. In addition, during periods of rising interest
rates, increases in the coupon rate of adjustable rate mortgages generally lag
current market interest rates slightly, thereby creating the potential for
capital depreciation on such securities.
MORTGAGE-BACKED SECURITIES -- COLLATERALIZED MORTGAGE OBLIGATIONS.
Collateralized mortgage obligations (CMOs) are mortgage-backed securities that
are collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO transaction are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
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the collateral pool are used to first pay interest and then pay principal to the
CMO bondholders. The bonds issued under a traditional CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in traditional
pass-through obligations. Subject to the various provisions of individual CMO
issues, the cash flow generated by the underlying collateral (to the extent it
exceeds the amount required to pay the stated interest) is used to retire the
bonds. Under a CMO structure, the repayment of principal among the different
tranches is prioritized in accordance with the terms of the particular CMO
issuance. The "fastest-pay" tranches of bonds, as specified in the prospectus
for the issuance, would initially receive all principal payments. When those
tranches of bonds are retired, the next tranche, or tranches, in the sequence,
as specified in the prospectus, receive all of the principal payments until they
are retired. The sequential retirement of bond groups continues until the last
tranche is retired. Accordingly, the CMO structure allows the issuer to use cash
flows of long maturity, monthly-pay collateral to formulate securities with
short, intermediate, and long final maturities and expected average lives and
risk characteristics.
In recent years, new types of CMO tranches have evolved. These include floating
rate CMOs, planned amortization classes, accrual bonds, and CMO residuals. These
newer structures affect the amount and timing of principal and interest received
by each tranche from the underlying collateral. Under certain of these new
structures, given classes of CMOs have priority over others with respect to the
receipt of prepayments on the mortgages. Therefore, depending on the type of
CMOs in which a fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-backed securities.
The primary risk of CMOs is the uncertainty of the timing of cash flows that
results from the rate of prepayments on the underlying mortgages serving as
collateral and from the structure of the particular CMO transaction (that is,
the priority of the individual tranches). An increase or decrease in prepayment
rates (resulting from a decrease or increase in mortgage interest rates) will
affect the yield, average life, and price of CMOs. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
MORTGAGE-BACKED SECURITIES--HYBRID ARMS. A hybrid adjustable-rate mortgage
(hybrid ARM) is a type of mortgage in which the interest rate is fixed for a
specified period and then resets periodically, or floats, for the remaining
mortgage term. Hybrid ARMs are usually referred to by their fixed and floating
periods. For example, a 5/1 ARM refers to a mortgage with a 5-year fixed
interest rate period, followed by a 1-year interest rate adjustment period.
During the initial interest period (i.e., the initial five years for a 5/1
hybrid ARM), hybrid ARMs behave more like fixed income securities and are
subject to the risks associated with fixed income securities. All hybrid ARMs
have reset dates. A reset date is the date when a hybrid ARM changes from a
fixed interest rate to a floating interest rate. At the reset date, a hybrid ARM
can adjust by a maximum specified amount based on a margin over an identified
index. Like ARMBSs, hybrid ARMs have periodic and lifetime limitations on the
increases that can be made to the interest rates that mortgagors pay. Therefore,
if during a floating rate period interest rates rise above the interest rate
limits of the hybrid ARM, a fund holding the hybrid ARM does not benefit from
further increases in interest rates.
MORTGAGE-BACKED SECURITIES -- STRIPPED MORTGAGE-BACKED SECURITIES. Stripped
mortgage-backed securities (SMBSs) are derivative multi-class mortgage-backed
securities. SMBSs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks, and special purpose entities formed or sponsored by any of the
foregoing.
SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The price and yield-to-maturity on an IO class is extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on a fund's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a fund may fail to recoup some or all of its initial investment in
these securities, even if the security is in one of the highest rating
categories.
Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet
B-15
developed and, accordingly, these securities may be deemed "illiquid" and
subject to a fund's limitations on investment in illiquid securities.
OPTIONS. An option is a derivative. An option on a security (or index) is a
contract that gives the holder of the option, in return for the payment of a
"premium," the right, but not the obligation, to buy from (in the case of a call
option) or sell to (in the case of a put option) the writer of the option the
security underlying the option (or the cash value of the index) at a specified
exercise price prior to the expiration date of the option. The writer of an
option on a security has the obligation upon exercise of the option (1) to
deliver the underlying security upon payment of the exercise price (in the case
of a call option) or (2) to pay the exercise price upon delivery of the
underlying security (in the case of a put option). The writer of an option on an
index has the obligation upon exercise of the option to pay an amount equal to
the cash value of the index minus the exercise price, multiplied by the
specified multiplier for the index option. The multiplier for an index option
determines the size of the investment position the option represents. Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size, and strike price, the terms of OTC
options (options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this type of
arrangement allows the purchaser or writer greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
The buyer (or holder) of an option is said to be "long" the option, while the
seller (or writer) of an option is said to be "short" the option. A call option
grants to the holder the right to buy (and obligates the writer to sell) the
underlying security at the strike price. A put option grants to the holder the
right to sell (and obligates the writer to buy) the underlying security at the
strike price. The purchase price of an option is called the "premium." The
potential loss to an option buyer is limited to the amount of the premium plus
transaction costs. This will be the case if the option is held and not exercised
prior to its expiration date. Generally, an option writer sells options with the
goal of obtaining the premium paid by the option buyer, but that person could
also seek to profit from an anticipated rise or decline in option prices. If an
option sold by an option writer expires without being exercised, the writer
retains the full amount of the premium. The option writer, however, has
unlimited economic risk because its potential loss, except to the extent offset
by the premium received when the option was written, is equal to the amount the
option is "in-the-money" at the expiration date. A call option is in-the-money
if the value of the underlying position exceeds the exercise price of the
option. A put option is in-the-money if the exercise price of the option exceeds
the value of the underlying position. Generally, any profit realized by an
option buyer represents a loss for the option writer. The writing of an option
will not be considered to constitute the issuance of a "senior security" by a
fund for purposes of the 1940 Act, and such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements
described under the heading "Borrowing."
If a trading market in particular options were to become unavailable, investors
in those options (such as the funds) would be unable to close out their
positions until trading resumes, and they may be faced with substantial losses
if the value of the underlying interest moves adversely during that time. Even
if the market were to remain available, there may be times when options prices
will not maintain their customary or anticipated relationships to the prices of
the underlying interests and related interests. Lack of investor interest,
changes in volatility, or other factors or conditions might adversely affect the
liquidity, efficiency, continuity, or even the orderliness of the market for
particular options.
A fund bears the risk that its advisor will not accurately predict future
market trends. If the advisor attempts to use an option as a hedge against, or
as a substitute for, a portfolio investment, the fund will be exposed to the
risk that the option will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the fund.
Although hedging strategies involving options can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in other fund investments. Many options, in particular
OTC options, are complex and often valued based on subjective factors. Improper
valuations can result in increased cash payment requirements to counterparties
or a loss of value to a fund.
OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to
the extent permitted by applicable law or SEC exemption. Under Section 12(d)(1)
of the 1940 Act, a fund generally may invest up to 10% of its assets in shares
of investment companies and up to 5% of its assets in any one investment
company, as long as no investment represents more than 3% of the voting stock of
an acquired investment company. The 1940 Act and related rules provide certain
exemptions from these restrictions. If a fund invests in other investment
companies, shareholders will bear not only their proportionate share of the
fund's expenses (including operating expenses and the fees of the advisor), but
also, indirectly, the similar expenses of the underlying investment companies.
Shareholders would also be
B-16
exposed to the risks associated not only to the investments of the fund but also
to the portfolio investments of the underlying investment companies. Certain
types of investment companies, such as closed-end investment companies, issue a
fixed number of shares that typically trade on a stock exchange or
over-the-counter at a premium or discount to their net asset value. Others are
continuously offered at net asset value but also may be traded on the secondary
market.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to
resell such security to the seller at an agreed upon price and date (normally,
the next business day). Because the security purchased constitutes collateral
for the repurchase obligation, a repurchase agreement may be considered a loan
that is collateralized by the security purchased. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by a
fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by a fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and be held by a custodian bank until repurchased. In
addition, the investment advisor will monitor a fund's repurchase agreement
transactions generally and will evaluate the creditworthiness of any bank,
broker, or dealer party to a repurchase agreement relating to a fund. The
aggregate amount of any such agreements is not limited except to the extent
required by law.
The use of repurchase agreements involves certain risks. One risk is the
seller's ability to pay the agreed-upon repurchase price on the repurchase date.
If the seller defaults, the fund may incur costs in disposing of the collateral,
which would reduce the amount realized thereon. If the seller seeks relief under
the bankruptcy laws, the disposition of the collateral may be delayed or
limited. For example, if the other party to the agreement becomes insolvent and
subject to liquidation or reorganization under the bankruptcy or other laws, a
court may determine that the underlying security is collateral for a loan by the
fund not within its control and therefore the realization by the fund on such
collateral may be automatically stayed. Finally, it is possible that the fund
may not be able to substantiate its interest in the underlying security and may
be deemed an unsecured creditor of the other party to the agreement.
RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that
cannot be sold or disposed of in the ordinary course of business within seven
business days at approximately the value at which they are being carried on a
fund's books. Illiquid securities may include a wide variety of investments,
such as: (1) repurchase agreements maturing in more than seven days; (2) OTC
options contracts and certain other derivatives (including certain swap
agreements); (3) fixed time deposits that are not subject to prepayment or do
not provide for withdrawal penalties upon prepayment (other than overnight
deposits); (4) participation interests in loans; (5) municipal lease
obligations; (6) commercial paper issued pursuant to Section 4(2) of the
Securities Act of 1933 (the 1933 Act); and (7) securities whose disposition is
restricted under the federal securities laws. Illiquid securities include
restricted, privately placed securities that, under the federal securities laws,
generally may be resold only to qualified institutional buyers. If a substantial
market develops for a restricted security (or other illiquid investment) held by
a fund, it may be treated as a liquid security, in accordance with procedures
and guidelines approved by the board of trustees. This generally includes
securities that are unregistered, that can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act, or that are exempt from
registration under the 1933 Act, such as commercial paper. While a fund's
advisor monitors the liquidity of restricted securities on a daily basis, the
board of trustees oversees and retains ultimate responsibility for the advisor's
liquidity determinations. Several factors that the trustees consider in
monitoring these decisions include the valuation of a security, the availability
of qualified institutional buyers, brokers, and dealers that trade in the
security, and the availability of information about the security's issuer.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells
a security to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase that security at an agreed-upon price and time. Under a
reverse repurchase agreement, the fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
Reverse repurchase agreements involve the risk that the market value of
securities retained by the fund may decline below the repurchase price of the
securities sold by the fund that it is obligated to repurchase. A reverse
repurchase agreement may be considered a borrowing transaction for purposes of
the 1940 Act. A reverse repurchase agreement transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements described under the heading "Borrowing." A fund
will enter into reverse repurchase agreements only with parties whose
creditworthiness has been reviewed and found satisfactory by the advisor.
B-17
SECURITIES LENDING. A fund may lend its investment securities to qualified
institutional investors (typically brokers, dealers, banks, or other financial
institutions) who may need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities, or completing arbitrage operations. By lending its investment
securities, a fund attempts to increase its net investment income through the
receipt of interest on the securities lent. Any gain or loss in the market price
of the securities lent that might occur during the term of the loan would be for
the account of the fund. If the borrower defaults on its obligation to return
the securities lent because of insolvency or other reasons, a fund could
experience delays and costs in recovering the securities lent or in gaining
access to the collateral. These delays and costs could be greater for foreign
securities. If a fund is not able to recover the securities lent, a fund may
sell the collateral and purchase a replacement investment in the market. The
value of the collateral could decrease below the value of the replacement
investment by the time the replacement investment is purchased. Cash received as
collateral through loan transactions may be invested in other eligible
securities. Investing this cash subjects that investment to market appreciation
or depreciation.
The terms and the structure and the aggregate amount of securities loans must
be consistent with the 1940 Act, and the rules or interpretations of the SEC
thereunder. These provisions limit the amount of securities a fund may lend to
33 1/3% of the fund's total assets, and require that (1) the borrower pledge and
maintain with the fund collateral consisting of cash, an irrevocable letter of
credit, or securities issued or guaranteed by the U.S. government having at all
times not less than 100% of the value of the securities lent; (2) the borrower
add to such collateral whenever the price of the securities lent rises (i.e.,
the borrower "marks-to-market" on a daily basis); (3) the loan be made subject
to termination by the fund at any time; and (4) 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 lent
securities, and any increase in their market value. Loan arrangements made by
each fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of three business days. The advisor will consider the creditworthiness of
the borrower, among other things, in making decisions with respect to the
lending of securities, subject to oversight by the board of trustees. At the
present time, the SEC does not object if an investment company pays reasonable
negotiated fees in connection with lent securities, so long as such fees are set
forth in a written contract and approved by the investment company's trustees.
In addition, voting rights pass with the lent securities, but if a fund has
knowledge that a material event will occur affecting securities on loan, and in
respect of which the holder of the securities will be entitled to vote or
consent, the lender must be entitled to call the loaned securities in time to
vote or consent.
SWAP AGREEMENTS. A swap agreement is a derivative. A swap agreement is an
agreement between two parties (counterparties) to exchange payments at specified
dates (periodic payment dates) on the basis of a specified amount (notional
amount) with the payments calculated with reference to a specified asset,
reference rate, or index.
Examples of swap agreements include, but are not limited to, interest rate
swaps, credit default swaps, equity swaps, commodity swaps, foreign currency
swaps, index swaps, and total return swaps. Most swap agreements provide that
when the periodic payment dates for both parties are the same, payments are
netted, and only the net amount is paid to the counterparty entitled to receive
the net payment. Consequently, a fund's current obligations (or rights) under a
swap agreement will generally be equal only to the net amount to be paid or
received under the agreement, based on the relative values of the positions held
by each counterparty. Swap agreements allow for a wide variety of transactions.
For example, fixed rate payments may be exchanged for floating rate payments;
U.S. dollar-denominated payments may be exchanged for payments denominated in a
different currency; and payments tied to the price of one asset, reference rate,
or index may be exchanged for payments tied to the price of another asset,
reference rate, or index.
An option on a swap agreement, also called a "swaption," is an option that
gives the buyer the right, but not the obligation, to enter into a swap on a
future date in exchange for paying a market-based "premium." A receiver swaption
gives the owner the right to receive the total return of a specified asset,
reference rate, or index. A payer swaption gives the owner the right to pay the
total return of a specified asset, reference rate, or index. Swaptions also
include options that allow an existing swap to be terminated or extended by one
of the counterparties.
The use of swap agreements by a fund entails certain risks, which may be
different from, or possibly greater than, the risks associated with investing
directly in the securities and other investments that are the referenced asset
for the swap agreement. Swaps are highly specialized instruments that require
investment techniques, risk analyses, and tax planning different from those
associated with stocks, bonds, and other traditional investments. The use of a
swap requires an understanding not only of the referenced asset, reference rate,
or index but also of the swap itself, without the benefit of observing the
performance of the swap under all possible market conditions.
B-18
Swap agreements may be subject to liquidity risk, which exists when a
particular swap is difficult to purchase or sell. If a swap transaction is
particularly large or if the relevant market is illiquid (as is the case with
many OTC swaps), it may not be possible to initiate a transaction or liquidate a
position at an advantageous time or price, which may result in significant
losses. In addition, swap transactions may be subject to a fund's limitation on
investments in illiquid securities.
Swap agreements may be subject to pricing risk, which exists when a particular
swap becomes extraordinarily expensive (or cheap) relative to historical prices
or the prices of corresponding cash market instruments. Under certain market
conditions, it may not be economically feasible to initiate a transaction or
liquidate a position in time to avoid a loss or take advantage of an opportunity
or to realize the intrinsic value of the swap agreement.
Because some swap agreements have a leverage component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the swap itself. Certain
swaps have the potential for unlimited loss, regardless of the size of the
initial investment. A leveraged swap transaction will not be considered to
constitute the issuance of a "senior security" by a fund, and such transaction
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by a fund, if the fund covers the transaction in accordance with
the requirements described above under the heading "Borrowing."
Like most other investments, swap agreements are subject to the risk that the
market value of the instrument will change in a way detrimental to a fund's
interest. A fund bears the risk that its advisor will not accurately forecast
future market trends or the values of assets, reference rates, indexes, or other
economic factors in establishing swap positions for the fund. If the advisor
attempts to use a swap as a hedge against, or as a substitute for, a portfolio
investment, the fund will be exposed to the risk that the swap will have or will
develop imperfect or no correlation with the portfolio investment. This could
cause substantial losses for the fund. Although hedging strategies involving
swap instruments can reduce the risk of loss, they can also reduce the
opportunity for gain or even result in losses by offsetting favorable price
movements in other fund investments. Many swaps, in particular OTC swaps, are
complex and often valued subjectively. Improper valuations can result in
increased cash payment requirements to counterparties or a loss of value to a
fund.
The use of a swap agreement also involves the risk that a loss may be sustained
as a result of the insolvency or bankruptcy of the counterparty or the failure
of the counterparty to make required payments or otherwise comply with the terms
of the agreement. Additionally, the use of credit default swaps can result in
losses if a fund's advisor does not correctly evaluate the creditworthiness of
the issuer on which the credit swap is based.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
TAX MATTERS -- FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required
for federal income tax purposes to recognize for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term, depending on the holding period of the contract. Sales of futures
contracts that are intended to hedge against a change in the value of securities
held by a fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A fund may be required to defer the recognition of losses on one
position, such as futures contracts, to the extent of any unrecognized gains on
a related offsetting position held by the fund.
In order for a fund to continue to qualify for federal income tax treatment as
a regulated investment company, at least 90% of its gross income for a taxable
year must be derived from qualifying income; i.e., dividends, interest, income
derived from loans of securities, gains from the sale of securities or of
foreign currencies, or other income derived with respect to the fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
A fund will distribute to shareholders annually any net capital gains that have
been recognized for federal income tax purposes on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the fund's other investments and shareholders will be advised on the nature of
the distributions.
TAX MATTERS -- FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules
govern the federal income tax treatment of certain transactions denominated in a
currency other than the U.S. dollar or determined by reference to the
B-19
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option, or
similar financial instrument if such instrument is not marked to market. The
disposition of a currency other than the U.S. dollar by a taxpayer whose
functional currency is the U.S. dollar is also treated as a transaction subject
to the special currency rules. However, foreign currency-related regulated
futures contracts and non-equity options are generally not subject to the
special currency rules if they are or would be treated as sold for their fair
market value at year-end under the marking-to-market rules applicable to other
futures contracts unless an election is made to have such currency rules apply.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary income or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts, and options that
are capital assets in the hands of the taxpayer and that are not part of a
straddle. The Treasury Department issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the IRC and the Treasury regulations)
will be integrated and treated as a single transaction or otherwise treated
consistently for purposes of the IRC. Any gain or loss attributable to the
foreign currency component of a transaction engaged in by a fund that is not
subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) will be treated as capital gain or loss and will
not be segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts a fund may make or enter into will be subject to the special
currency rules described above.
TAX MATTERS -- MARKET DISCOUNT. The price of a bond purchased after its
original issuance may reflect market discount that, depending on the particular
circumstances, may affect the tax character and amount of income required to be
recognized by a fund holding the bond. In determining whether a bond is
purchased with market discount, certain de minimis rules apply.
TAX MATTERS --TAX CONSIDERATIONS FOR NON-U.S. INVESTORS. U.S. withholding and
estate taxes may apply to any investments made by non-U.S. investors in Vanguard
funds. The American Jobs Creation Act of 2004 provided relief from U.S.
withholding tax for certain properly designated distributions made with respect
to a fund's taxable year beginning prior to 2008, assuming the investor provided
tax documentation certifying non-U.S. status. The relief does not by its terms
apply to a fund's taxable year beginning in or after 2008 unless so extended by
Congress.
Please be aware that the U.S. tax information contained in this Statement of
Additional Information is not intended or written to be used, and cannot be
used, for the purpose of avoiding U.S. tax penalties.
TEMPORARY INVESTMENTS. A fund may take temporary defensive positions that are
inconsistent with the fund's normal fundamental or non-fundamental investment
policies and strategies in response to adverse or unusual market, economic,
political, or other conditions as determined by the advisor. Such positions
could include, but are not limited to, investments in (1) highly liquid
short-term fixed income securities issued by or on behalf of municipal or
corporate issuers, obligations of the U.S. government and its agencies,
commercial paper, and bank certificates of deposit; (2) repurchase agreements
involving any such securities; and (3) other money market instruments. There is
no limit on the extent to which the fund may take temporary defensive positions.
In taking such positions, the fund may fail to achieve its investment objective.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS.
When-issued, delayed-delivery, and forward-commitment transactions involve a
commitment to purchase or sell specific securities at a predetermined price or
yield in which payment and delivery take place after the customary settlement
period for that type of security. Typically, no interest accrues to the
purchaser until the security is delivered. When purchasing securities pursuant
to one of these transactions, payment for the securities is not required until
the delivery date. However, the purchaser assumes the rights and risks of
ownership, including the risks of price and yield fluctuations and the risk that
the security will not be issued as anticipated. When a fund has sold a security
pursuant to one of these transactions, the fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
fund could miss a favorable price or yield opportunity or suffer a loss. A fund
may renegotiate a when-issued or forward-commitment transaction and may sell the
underlying securities before delivery, which may result in capital gains or
losses for the fund. When-issued, delayed-delivery, and forward-commitment
transactions will not be considered to constitute the issuance of a "senior
security" by a fund, and such transaction will not be subject to the 300% asset
B-20
coverage requirement otherwise applicable to borrowings by the fund, if the fund
covers the transaction in accordance with the requirements described under the
heading "Borrowing."
INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of shares means
shares representing the lesser of: (1) 67% or more of the Fund's net assets
voted, so long as shares representing more than 50% of the Fund's net assets are
present or represented by proxy; or (2) more than 50% of the Fund's net assets.
BORROWING. Each Fund may not borrow money in excess of 15% of its net assets,
and any borrowings by the Fund must comply with all applicable regulatory
requirements.
COMMODITIES. Each Fund may not invest in commodities, except that it may invest
in futures contracts and options transactions. No more than 5% of a Fund's total
assets may be used as initial margin deposit for futures contracts, and no more
than 20% of the Fund's total assets may be invested in futures contracts or
options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, each Fund may not:
(1) purchase more than 10% of the outstanding voting securities of any one
issuer; or (2) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. government or its agencies
or instrumentalities.
ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. Each Fund will not invest more than 25% of its total
assets in any one industry except as necessary to approximate the composition of
its target index.
INVESTING FOR CONTROL.* Each Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT OBJECTIVE. The investment objective of each Fund may not be
materially changed without a shareholder vote.
LOANS. Each Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by entering into repurchase agreements, by lending its
portfolio securities, or through Vanguard's interfund lending program.
MARGIN.* Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS.* Each Fund may not invest in interests in oil, gas, or
other mineral exploration or development programs.
PLEDGING ASSETS.* Each Fund may not pledge, mortgage, or hypothecate more than
15% of its net assets.
REAL ESTATE. Each Fund may not invest directly in real estate, although it may
invest in securities of companies that deal in real estate and bonds secured by
real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities.
UNDERWRITING. Each Fund may not act as an underwriter of another issuer's
securities, except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the 1933 Act, in connection with the purchase
and sale of portfolio securities.
*These limitations are non-fundamental for Vanguard Inflation-Protected
Securities Fund, and, therefore, may be changed without a shareholder vote. The
Inflation-Protected Securities Fund, as a non-fundamental policy, also may not
1) invest more than 5% of its total assets in companies that have less than
three years of operating history (including the operating history of any
predecessors); or 2) purchase or sell warrants, put options, or call options,
except as permitted by the Fund's investment limitation relating to commodities.
B-21
Compliance with the investment limitations set forth above is generally
measured at the time the securities are purchased. Unless otherwise required by
the 1940 Act, if a percentage restriction is adhered to at the time the
investment is made, a later change in percentage resulting from a change in the
market value of assets will not constitute a violation of such restriction. All
investment limitations must comply with applicable regulatory requirements. For
more details, see "Investment Policies."
None of these limitations prevents the Funds from having an ownership interest
in Vanguard. As a part owner of Vanguard, each Fund may own securities issued by
Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other
financial requirements. See "Management of the Funds" for more information.
SHARE PRICE
Multiple-class funds do not have a single share price. Rather, each class has a
share price, called its net asset value, or NAV, that is calculated each
business day as of the close of regular trading on the New York Stock Exchange
(the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by
dividing the net assets allocated to each share class by the number of Fund
shares outstanding for that class.
The Exchange typically observes the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day (Washington's Birthday), Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Although each Fund expects the same holidays to be observed in the future, the
Exchange may modify its holiday schedule or hours of operation at any time.
PURCHASE AND REDEMPTION OF SHARES
When purchasing shares from a Fund (whether directly or through a broker), the
purchase price is the NAV per share next determined after the purchase request
is received in good order, as defined in the Fund's prospectus. (If you purchase
ETF Shares on the secondary market, by contrast, you will pay the prevailing
market price, which may be higher or lower than the NAV.)
Each Fund, except the Inflation-Protected Securities Fund, reserves the right
to impose a transaction fee on any purchase of non-ETF shares that, in the
opinion of the advisor, would disrupt efficient management of the Fund. The
advisor currently believes that it may be necessary to impose the transaction
fees specified in the following table if an investor's aggregate purchases into
any Fund over a twelve-month period exceed, or are expected to exceed, the
indicated amounts.
FUND TRANSACTION FEE AGGREGATE PURCHASES
---- --------------- -------------------
Vanguard Total Bond Market Index Fund 0.18% Over $500 million
Vanguard Short-Term Bond Index Fund 0.15 Over $100 million
Vanguard Intermediate-Term Bond Index Fund 0.23 Over $100 million
Vanguard Long-Term Bond Index Fund 0.21 Over $100 million
|
When applicable, transaction fees will be imposed on the aggregate amount of an
investor's purchases. Fees are based on the advisor's estimate of the
transaction costs incurred by each Fund in accepting new investments, which
depends on the types of securities in which each Fund invests. Fees may be
waived or reduced, however, if an investor's purchases can be offset by other
shareholders' redemptions from the same Fund. Prospective investors may
determine whether the fee will be imposed on their investments by calling
Vanguard's Institutional Division.
REDEMPTION OF SHARES (OTHER THAN ETF SHARES)
The redemption price of shares of each Fund is the NAV next determined after the
redemption request is received in good order, as defined in the Fund's
prospectus.
Each Fund may suspend redemption privileges or postpone the date of payment for
redeemed shares: (1) during any period that the Exchange is closed or trading on
the Exchange is restricted as determined by the SEC; (2) during any period when
an emergency exists, as defined by the SEC, as a result of which it is not
reasonably practicable for the
B-22
Fund to dispose of securities it owns or to fairly determine the value of its
assets; and (3) for such other periods as the SEC may permit.
Each Fund has filed a notice of election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
If Vanguard determines that it would be detrimental to the best interests of
the remaining shareholders of a Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price in whole or in part by a distribution in
kind of readily marketable securities held by the Fund in lieu of cash in
conformity with applicable rules of the SEC. Investors may incur brokerage
charges on the sale of such securities received in payment of redemptions.
The Funds do not charge redemption fees, except for wire redemptions in amounts
less than $5,000 (which will be subject to a charge of $5.00). Shares redeemed
may be worth more or less than what was paid for them, depending on the market
value of the securities held by the Fund.
RIGHT TO CHANGE POLICIES
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon initial notification to Vanguard of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
Each Fund has authorized certain agents to accept on its behalf purchase and
redemption orders, and those agents are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf
(collectively, Authorized Agents). A Fund will be deemed to have received a
purchase or redemption order when an Authorized Agent accepts the order in
accordance with the Fund's instructions. In most instances, a customer order
that is properly transmitted to an Authorized Agent will be priced at the Fund's
NAV next determined after the order is received by the Authorized Agent.
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of individual clients. However, we
review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees,
intermediaries will be asked to assess purchase and redemption fees on
shareholder and participant accounts and remit these fees to the funds. The
application of purchase and redemption fees and frequent-trading policies may
vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
you invest with Vanguard through an intermediary, please read that firm's
materials carefully to learn of any other rules or fees that may apply.
B-23
MANAGEMENT OF THE FUNDS
VANGUARD
Each Fund is part of the Vanguard group of investment companies, which consists
of more than 150 funds. Through their jointly-owned subsidiary, Vanguard, the
funds obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to several of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative personnel
needed to provide the requisite services to the funds and also furnishes the
funds with necessary office space, furnishings, and equipment. Each fund pays
its share of Vanguard's total expenses, which are allocated among the funds
under methods approved by the board of trustees of each fund. In addition, each
fund bears its own direct expenses, such as legal, auditing, and custodian fees.
The funds' officers are also officers and employees of Vanguard.
Vanguard, Vanguard Marketing Corporation, the funds' advisors, and the funds
have adopted Codes of Ethics designed to prevent employees who may have access
to nonpublic information about the trading activities of the funds (access
persons) from profiting from that information. The Codes permit access persons
to invest in securities for their own accounts, including securities that may be
held by a fund, but place substantive and procedural restrictions on the trading
activities of access persons. For example, the Codes require that access persons
receive advance approval for most securities trades to ensure that there is no
conflict with the trading activities of the funds. The Codes also limit the
ability of Vanguard employees to engage in short-term trading of Vanguard funds.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement. The Amended and Restated Funds' Service Agreement provides as
follows: (1) each Vanguard fund may be called upon to invest up to 0.40% of its
current net assets in Vanguard, and (2) there is no other limitation on the
dollar amount that each Vanguard fund may contribute to Vanguard's
capitalization. The amounts that each fund has invested are adjusted from time
to time in order to maintain the proportionate relationship between each fund's
relative net assets and its contribution to Vanguard's capital. As of December
31, 2007, the Funds had contributed $6,899,000 to Vanguard, which represented
0.01% of each Fund's net assets and was 6.89% of Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation (VMC), 400 Devon Park Drive A39,
Wayne, PA 19087, a wholly-owned subsidiary of Vanguard, is the principal
underwriter for the funds and in that capacity performs and finances marketing,
promotional, and distribution activities (collectively, marketing and
distribution activities) that are primarily intended to result in the sale of
the funds' shares. VMC performs marketing and distribution activities at cost in
accordance with the terms and conditions of a 1981 SEC exemptive order that
permits the Vanguard funds to internalize and jointly finance the marketing,
promotion, and distribution of their shares. Under the terms of the SEC order,
the funds' trustees review and approve the marketing and distribution expenses
incurred on their behalf, including the nature and cost of the activities and
the desirability of each fund's continued participation in the joint
arrangement.
To ensure that each fund's participation in the joint arrangement falls within
a reasonable range of fairness, each fund contributes to VMC's marketing and
distribution expenses in accordance with an SEC-approved formula. Under that
formula, one half of the marketing and distribution expenses are allocated among
the funds based upon their relative net assets. The remaining half of those
expenses is allocated among the funds based upon each fund's sales for the
preceding 24 months relative to the total sales of the funds as a group;
provided, however, that no fund's aggregate quarterly rate of contribution for
marketing and distribution expenses shall exceed 125% of the average marketing
and distribution expense rate for Vanguard, and that no fund shall incur annual
marketing and distribution expenses in excess of 0.20 of 1% of its average
month-end net assets. As of December 31, 2007, none of the Vanguard funds'
allocated share of VMC's marketing and distribution expenses was greater than
0.03% of the fund's average month-end net assets. Each fund's contribution to
these marketing and distribution expenses helps to maintain and enhance the
attractiveness and viability of the Vanguard complex as a whole, which benefits
all of the funds and their shareholders.
B-24
VMC's principal marketing and distribution expenses are for advertising,
promotional materials, and marketing personnel. Other marketing and distribution
activities that VMC undertakes on behalf of the funds may include, but are not
limited to:
- Conducting or publishing Vanguard-generated research and analysis concerning
the funds, other investments, the financial markets, or the economy;
- Providing views, opinions, advice, or commentary concerning the funds, other
investments, the financial markets, or the economy;
- Providing analytical, statistical, performance, or other information
concerning the funds, other investments, the financial markets, or the economy;
- Providing administrative services in connection with investments in the funds
or other investments, including, but not limited to, shareholder services,
recordkeeping services, and educational services;
- Providing products or services that assist investors or financial service
providers (as defined below) in the investment decision-making process;
- Providing promotional discounts, commission-free trading, fee waivers, and
other benefits to clients of Vanguard Brokerage Services/(R)/ who maintain
qualifying investments in the funds; and
- Sponsoring, jointly sponsoring, financially supporting, or participating in
conferences, programs, seminars, presentations, meetings, or other events
involving fund shareholders, financial service providers, or others concerning
the funds, other investments, the financial markets, or the economy, such as
industry conferences, prospecting trips, due diligence visits, training or
education meetings, and sales presentations.
VMC performs most marketing and distribution activities itself. Some activities
may be conducted by third parties pursuant to shared marketing arrangements
under which VMC agrees to share the costs and performance of marketing and
distribution activities in concert with a financial service provider. Financial
service providers include, but are not limited to, investment advisors,
broker-dealers, financial planners, financial consultants, banks, and insurance
companies. Under these cost- and performance-sharing arrangements, VMC may pay
or reimburse a financial service provider (or a third party it retains) for
marketing and distribution activities that VMC would otherwise perform. VMC's
cost- and performance-sharing arrangements may be established in connection with
Vanguard investment products or services offered or provided to or through the
financial service providers. VMC's arrangements for shared marketing and
distribution activities may vary among financial service providers, and its
payments or reimbursements to financial service providers in connection with
shared marketing and distribution activities may be significant. VMC does not
participate in the offshore arrangement Vanguard has established for qualifying
Vanguard funds to be distributed in certain foreign countries on a
private-placement basis to government-sponsored and other institutional
investors through a third-party "asesor de inversiones" (investment advisor),
which includes incentive-based remuneration.
In connection with its marketing and distribution activities, VMC may give
financial service providers (or their representatives): (1) promotional items of
nominal value that display Vanguard's logo, such as golf balls, shirts, towels,
pens, and mouse pads; (2) gifts that do not exceed $100 per person annually and
are not preconditioned on achievement of a sales target; (3) an occasional meal,
a ticket to a sporting event or the theater, or comparable entertainment that is
neither so frequent nor so extensive as to raise any question of propriety and
is not preconditioned on achievement of a sales target; and (4) reasonable
travel and lodging accommodations to facilitate participation in marketing and
distribution activities.
VMC, as a matter of policy, does not pay asset-based fees, sales-based fees, or
account-based fees to financial service providers in connection with its
marketing and distribution activities for the Vanguard funds. VMC policy also
prohibits marketing and distribution activities that are intended, designed, or
likely to compromise suitability determinations by, or the fulfillment of any
fiduciary duties or other obligations that apply to, financial service
providers. Nonetheless, VMC's marketing and distribution activities are
primarily intended to result in the sale of the funds' shares, and as such its
activities, including shared marketing and distribution activities, may
influence participating financial service providers (or their representatives)
to recommend, promote, include, or invest in a Vanguard fund or share class. In
addition, Vanguard or any of its subsidiaries may retain a financial service
provider to provide consulting or other services, and that financial service
provider also may provide services to investors. Investors should consider the
possibility that any of these activities or relationships may influence a
financial service provider's (or its representatives') decision to recommend,
promote, include, or invest in a Vanguard fund or share class. Each financial
service provider should consider its suitability determinations, fiduciary
duties, and other legal obligations (or those of its representatives) in
connection with any decision to consider, recommend, promote, include, or invest
in a Vanguard fund or share class.
B-25
The following table describes the expenses of Vanguard and VMC that are shared
by the funds on an at-cost basis under the terms of two SEC exemptive orders.
Amounts captioned "Management and Administrative Expenses" include a fund's
allocated share of expenses associated with the management, administrative, and
transfer agency services Vanguard provides to the funds. Amounts captioned
"Marketing and Distribution Expenses" include a fund's allocated share of
expenses associated with the marketing and distribution activities that VMC
conducts on behalf of the Vanguard funds.
As is the case with all mutual funds, transaction costs incurred by the Funds
for buying and selling securities are not reflected in the table. Annual Shared
Fund Operating Expenses are based on expenses incurred in the fiscal years ended
December 31, 2005, 2006, and 2007 (January 31, 2005, 2006, and 2007 for Vanguard
Inflation-Protected Securities Fund), and are presented as a percentage of each
Fund's average month-end net assets.
ANNUAL SHARED FUND OPERATING EXPENSES
(SHARED EXPENSES DEDUCTED FROM FUND ASSETS)
-------------------------------------------
FUND 2005 2006 2007
---- ---- ---- ----
Vanguard Total Bond Market Index Fund
Management and Administrative Expenses: 0.13% 0.13% 0.12%
Marketing and Distribution Expenses: 0.02 0.03 0.03
Vanguard Short-Term Bond Index Fund
Management and Administrative Expenses: 0.13% 0.12% 0.11%
Marketing and Distribution Expenses: 0.02 0.03 0.03
Vanguard Intermediate-Term Bond Index Fund
Management and Administrative Expenses: 0.13% 0.12% 0.11%
Marketing and Distribution Expenses: 0.02 0.03 0.03
Vanguard Long-Term Bond Index Fund
Management and Administrative Expenses: 0.16% 0.15% 0.13%
Marketing and Distribution Expenses: 0.02 0.03 0.03
Vanguard Inflation-Protected Securities Fund/1/
Management and Administrative Expenses: 0.15% 0.13% 0.13%
Marketing and Distribution Expenses: 0.03 0.02 0.04
1 Prior to November 13, 2007, the Fund was a series of Vanguard Fixed Income
Securities Funds.
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OFFICERS AND TRUSTEES
Each Fund is governed by the board of trustees to the Trust and a single set of
officers. The officers manage the day-to-day operations of the Funds under the
direction of the Funds' board of trustees. The trustees set broad policies for
the Funds; select investment advisors; monitor fund operations, performance, and
costs; nominate and select new trustees; and elect fund officers. Each trustee
serves a Fund until its termination; until the trustee's retirement,
resignation, or death; or as otherwise specified in the Trust's organizational
documents. Any trustee may be removed at a meeting of shareholders by a vote
representing two-thirds of the total net asset value of all shares of the Funds.
Each trustee also serves as a director of Vanguard.
The following chart shows information for each trustee and executive officer of
the Funds. The mailing address of the trustees and officers is P.O. Box 876,
Valley Forge, PA 19482.
NUMBER OF
VANGUARD VANGUARD FUNDS
POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS OVERSEEN BY
NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS TRUSTEE/OFFICER
------------------- --------------- -------------- -------------------------- ---------------
INTERESTED TRUSTEE
John J. Brennan/1/ Chairman of the May 1987 Chairman of the Board, Chief Executive Officer, and 155
(1954) Board, Chief Director (Trustee) of Vanguard and each of the
Executive Officer, investment companies served by Vanguard; Director
and Trustee of VMC.
1 Officers of the Funds are "interested persons" as defined in the 1940 Act.
|
B-26
NUMBER OF
VANGUARD VANGUARD FUNDS
POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS OVERSEEN BY
NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS TRUSTEE/OFFICER
------------------- --------------- -------------- -------------------------- ---------------
INDEPENDENT TRUSTEES
Charles D. Ellis Trustee January 2001 Applecore Partners (pro bono ventures in education); 155
(1937) Senior Advisor to Greenwich Associates (international
business strategy consulting); Successor Trustee of
Yale University; Overseer of the Stern School of
Business at New York University; Trustee of the
Whitehead Institute for Biomedical Research.
Emerson U. Fullwood Trustee January 2008 Executive Chief Staff and Marketing Officer for North 155
(1948) America since 2004 and Corporate Vice President of
Xerox Corporation (photocopiers and printers); Director
of SPX Corporation (multi-industry manufacturing), of
the United Way of Rochester, and of the Boy Scouts of
America.
Rajiv L. Gupta Trustee December 2001 Chairman, President, and Chief Executive Officer of 155
(1945) Rohm and Haas Co. (chemicals); Board Member of
American Chemistry Council; Director of Tyco
International, Ltd. (diversified manufacturing and
services) since 2005.
Amy Gutmann Trustee June 2006 President of the University of Pennsylvania since 2004; 155
(1949) Professor in the School of Arts and Sciences,
Annenberg School for Communication, and Graduate
School of Education of the University of Pennsylvania
since 2004; Provost (2001-2004) and Laurance S.
Rockefeller Professor of Politics and the University
Center for Human Values (1990-2004), Princeton
University; Director of Carnegie Corporation of New
York since 2005, and of Schuylkill River Development
Corporation and Greater Philadelphia Chamber of
Commerce since 2004; Trustee of the National
Constitution Center since 2007.
JoAnn Heffernan Heisen Trustee July 1998 Corporate Vice President and Chief Global Diversity 155
(1950) Officer since 2006, Vice President and Chief
Information Officer (1997-2005), and Member of the
Executive Committee of Johnson & Johnson
(pharmaceuticals/consumer products); Director of the
University Medical Center at Princeton and Women's
Research and Education Institute.
Andre F. Perold Trustee December 2004 George Gund Professor of Finance and Banking, 155
(1952) Harvard Business School; Senior Associate Dean,
Director of Faculty Recruiting, Harvard Business
School; Director and Chairman of UNX, Inc. (equities
trading firm); Chair of the Investment Committee of
HighVista Strategies LLC (private investment firm)
since 2005.
Alfred M. Rankin, Jr. Trustee January 1993 Chairman, President, Chief Executive Officer, and 155
(1941) Director of NACCO Industries, Inc.(forklift trucks/
housewares/lignite); Director of Goodrich Corporation
(industrial products/aircraft systems and services).
|
B-27
NUMBER OF
VANGUARD VANGUARD FUNDS
POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS OVERSEEN BY
NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS TRUSTEE/OFFICER
------------------- --------------- -------------- -------------------------- ---------------
J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive Officer of Rohm 155
(1936) and Haas Co. (chemicals); Director of Cummins Inc.
(diesel engines) and AmerisourceBergen Corp.
(pharmaceutical distribution); Trustee of Vanderbilt
University and Culver Educational Foundation.
------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
Thomas J. Higgins/1/ Treasurer July 1998 Principal of Vanguard; Treasurer of each of the 155
(1957) investment companies served by Vanguard.
F. William McNabb III/1/ President March 2008 President of Vanguard and each of the 155
(1957) investment companies served by Vanguard,
since 2008; Director of VMC, Managing
Director of Vanguard(1995-2008).
Heidi Stam/1/ Secretary July 2005 Managing Director of Vanguard since 2006; General 155
(1956) Counsel of Vanguard since 2005; Secretary of
Vanguard and of each of the investment companies
served by Vanguard, since 2005; Director and Senior
Vice President of VMC since 2005; Principal of
Vanguard (1997-2006).
/1/Officers of the Fund are "interested persons" as defined in the 1940 Act.
|
Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on
business strategy to professional financial services organizations in markets
around the world. A large number of financial service providers, including
Vanguard, subscribe to programs of research-based consulting. During calendar
years 2006 and 2007, Vanguard paid Greenwich subscription fees amounting to less
than $610,000. Vanguard's subscription rates are similar to those of other
subscribers.
Board Committees: The Trust's board has the following committees:
- Audit Committee: This committee oversees the accounting and financial
reporting policies, the systems of internal controls, and the independent
audits of each fund and Vanguard. All independent trustees serve as members of
the committee. The committee held two meetings during the Funds' last fiscal
year.
- Compensation Committee: This committee oversees the compensation programs
established by each fund and Vanguard for the benefit of their employees,
officers, and trustees/directors. All independent trustees serve as members of
the committee. The committee held six meetings during the Funds' last fiscal
year.
- Nominating Committee: This committee nominates candidates for election to
Vanguard's board of directors and the board of trustees of each fund
(collectively, the Vanguard boards). The committee also has the authority to
recommend the removal of any director or trustee from the Vanguard boards. All
independent trustees serve as members of the committee. The committee held
seven meetings during the Funds' last fiscal year.
The Nominating Committee will consider shareholder recommendations for trustee
nominees. Shareholders may send recommendations to Mr. Rankin, Chairman of the
Committee.
TRUSTEE COMPENSATION
The same individuals serve as trustees of all Vanguard funds and each fund pays
a proportionate share of the trustees' compensation. The funds also employ their
officers on a shared basis; however, officers are compensated by Vanguard, not
the funds.
B-28
INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e.,
the ones who are not also officers of the funds) in three ways:
- The independent trustees receive an annual fee for their service to the funds,
which is subject to reduction based on absences from scheduled board meetings.
- The independent trustees are reimbursed for the travel and other expenses that
they incur in attending board meetings.
- Upon retirement (after attaining age 65 and completing five years of service),
the independent trustees who began their service prior to January 1, 2001,
receive a retirement benefit under a separate account arrangement. As of
January 1, 2001, the opening balance of each eligible trustee's separate
account was generally equal to the net present value of the benefits he or she
had accrued under the trustees' former retirement plan. Each eligible trustee's
separate account will be credited annually with interest at a rate of 7.5%
until the trustee receives his or her final distribution. Those independent
trustees who began their service on or after January 1, 2001, are not eligible
to participate in the plan.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this
capacity. He is, however, paid in his role as an officer of Vanguard.
COMPENSATION TABLE. The following table provides compensation details for each
of the trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Funds for each trustee. In addition, the table shows
the total amount of benefits that we expect each trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each trustee by all Vanguard funds. (Emerson Fullwood is not included in the
table because he did not serve as trustee as of December 31, 2007.)
VANGUARD BOND INDEX FUNDS
TRUSTEES' COMPENSATION TABLE
Pension or Retirement Accrued Annual Total Compensation
Aggregate Benefits Accrued Retirement from All Vanguard
Compensation as Part of these Benefit at Funds Paid
Trustee from these Funds(1) Funds' Expenses(1) January 1, 2007(2) to Trustees(3)
------- ------------------- ------------------ ------------------ --------------
John J. Brennan -- -- -- --
Charles D. Ellis $10,553 -- -- $145,000
Rajiv L. Gupta 10,252 -- -- 145,000
Amy Gutmann 10,553 -- -- 145,000
JoAnn Heffernan Heisen 10,553 $223 $2,542 145,000
Andre F. Perold 10,553 -- -- 145,000
Alfred M. Rankin, Jr. 11,476 270 4,982 168,000
J. Lawrence Wilson 10,252 285 7,240 140,900
1 The amounts shown in this column are based on the Funds' fiscal year ended December 31, 2007. Each Fund
within the Trust is responsible for a proportionate share of these amounts.
2 Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60
consecutive months) of service as a trustee for the Vanguard funds. The annual retirement benefit will be
paid in monthly installments, beginning with the month following the trustee's retirement from service, and
will cease after 10 years of payments (120 monthly installments). Trustees who began their service on or
after January 1, 2001, are not eligible to participate in the retirement benefit plan.
3 The amounts reported in this column reflect the total compensation paid to each trustee for his or her
service as trustee of 152 Vanguard funds for the 2007 calendar year.
|
B-29
OWNERSHIP OF FUND SHARES
All trustees allocate their investments among the various Vanguard funds based
on their own investment needs. The following table shows each trustee's
ownership of shares of each Fund and of all Vanguard funds served by the trustee
as of December 31, 2007.
AGGREGATE DOLLAR
DOLLAR RANGE OF RANGE OF VANGUARD
FUND SHARES OWNED FUND SHARES
FUND TRUSTEE BY TRUSTEE OWNED BY TRUSTEE
---- ------- ----------------- ----------------
VANGUARD TOTAL BOND MARKET INDEX FUND John J. Brennan -- Over $100,000
Charles D. Ellis -- Over $100,000
Emerson U. Fullwood/1/ -- Over $100,000
Rajiv L. Gupta -- Over $100,000
Amy Gutmann -- Over $100,000
JoAnn Heffernan Heisen -- Over $100,000
Andre F. Perold -- Over $100,000
Alfred M. Rankin, Jr. -- Over $100,000
J. Lawrence Wilson -- Over $100,000
VANGUARD SHORT-TERM BOND INDEX FUND John J. Brennan -- Over $100,000
Charles D. Ellis -- Over $100,000
Emerson U. Fullwood/1/ -- Over $100,000
Rajiv L. Gupta -- Over $100,000
Amy Gutmann -- Over $100,000
JoAnn Heffernan Heisen -- Over $100,000
Andre F. Perold -- Over $100,000
Alfred M. Rankin, Jr. -- Over $100,000
J. Lawrence Wilson -- Over $100,000
VANGUARD INTERMEDIATE-TERM BOND INDEX FUND John J. Brennan -- Over $100,000
Charles D. Ellis -- Over $100,000
Emerson U. Fullwood/1/ -- Over $100,000
Rajiv L. Gupta -- Over $100,000
Amy Gutmann -- Over $100,000
JoAnn Heffernan Heisen -- Over $100,000
Andre F. Perold -- Over $100,000
Alfred M. Rankin, Jr. -- Over $100,000
J. Lawrence Wilson -- Over $100,000
VANGUARD LONG-TERM BOND INDEX FUND John J. Brennan -- Over $100,000
Charles D. Ellis -- Over $100,000
Emerson U. Fullwood/1/ -- Over $100,000
Rajiv L. Gupta -- Over $100,000
Amy Gutmann -- Over $100,000
JoAnn Heffernan Heisen -- Over $100,000
Andre F. Perold -- Over $100,000
Alfred M. Rankin, Jr. -- Over $100,000
J. Lawrence Wilson -- Over $100,000
1 Mr. Fullwood became a member of the Funds' board effective January 2008.
|
B-30
AGGREGATE DOLLAR
DOLLAR RANGE OF RANGE OF VANGUARD
FUND SHARES OWNED FUND SHARES
FUND TRUSTEE BY TRUSTEE OWNED BY TRUSTEE
---- ------- ----------------- ----------------
VANGUARD INFLATION-PROTECTED SECURITIES FUND John J. Brennan -- Over $100,000
Charles D. Ellis -- Over $100,000
Emerson U. Fullwood/1/ -- Over $100,000
Rajiv L. Gupta -- Over $100,000
Amy Gutmann -- Over $100,000
JoAnn Heffernan Heisen -- Over $100,000
Andre F. Perold -- Over $100,000
Alfred M. Rankin, Jr. -- Over $100,000
J. Lawrence Wilson -- Over $100,000
1 Mr. Fullwood became a member of the Funds' board effective January 2008.
|
As of March 31, 2008, the trustees and executive officers of the funds owned,
in the aggregate, less than 1% of each class of each fund's outstanding shares.
As of March 31, 2008, those listed below owned of record 5% or more of each
class's outstanding shares:
Vanguard Inflation Protected Securities Fund--Investor Shares: Charles Schwab &
Company, Inc, San Francisco, CA (13.35%), National Financial Services
Corporation, New York, NY (12.19%); Vanguard Inflation Protected Securities
Fund--Admiral Shares: Charles Schwab & Company, Inc., San Francisco, CA (9.47%),
National Financial Services Corporation, New York, NY (7.12%); Inflation
Protected Securities Fund--Institutional Shares: Northern Trust Company as
Trustee, Chicago, IL (6.01%), New York College Savings Program, Newton, MA
(7.23%); Vanguard Intermediate-Term Bond Index Fund--Investor Shares: Charles
Schwab & Company, Inc, San Francisco, CA (7.21%), National Financial Services
Corporation, New York, NY (8.14%); Vanguard Intermediate-Term Bond Index
Fund--Institutional Shares: Marshall & Ilsley Trust Company, Milwaukee, WI
(13.48%), SEI Private Trust Company, Oaks, PA (23.07%), Sisters of Saint
Dominic, Racine, WI (7.72%), State Street Bank & Trust, Westwood, MA (9.93%), T.
Rowe Price Retirement Service Inc., Ownings Mills, MD (12.38%), Texas Tech
University System, Lubbock, TX (9.98%); Intermediate-Term Bond Index
Fund--Signal Shares: Charles Schwab & Co Inc., San Francisco, CA (9.17%),
Minnesota Mutual Life, St. Paul, MN (6.34%), National Financial Services, New
York, NY (13.98%); Vanguard Long-Term Bond Index Fund--Institutional Shares:
Hoco, Kansas City, MO (10.03%), Investors Bank & Trust FBO Blue Diamond DB Plan,
Purchase, NY (6.04%), JP Morgan Chase Bank, NA Trustee, The Travelers Pension
Trust, Saint Paul, MN (28.43%), Mitra & CO FBO 98, Milwaukee, WI (8.02%), State
Street Bank & Trust, Kansas City, MO (6.25%), Wells Fargo Bank, Minneapolis, MN
(5.93%); Vanguard Short-Term Bond Index Fund--Investor Shares: Charles Schwab &
Company, Inc, San Francisco, CA (10.11%), National Financial Services
Corporation, New York, NY (11.95%); Vanguard Short-Term Bond Index Fund--Signal
Shares: Charles Schwab & Company, Inc, San Francisco, CA (9.51%), National
Financial Services Corporation, New York, NY (10.62%), The University of South
Florida, Tampa, FL (8.93%); Vanguard Total Bond Market Index Fund--Investor
Shares: Vanguard LifeStrategy Conservative Growth Fund, Valley Forge, PA
(6.52%), Vanguard LifeStrategy Moderate Growth Fund, Valley Forge, PA (10.05%),
Vanguard Target Retirement 2025 Fund, Valley Forge, PA (5.14%), Vanguard Target
Retirement 2015 Fund, Valley Forge, PA (8.80%); Vanguard Total Bond Market Index
Fund--Institutional Shares: National Financial Services, New York, NY (7.83%);
Vanguard Total Bond Market Index Fund--Signal Shares: Charles Schwab & Company,
Inc, San Francisco, CA (12.08%), National Financial Services Corporation, New
York, NY (7.72%), Chevron Employees Savings Investment Plan, San Ramon, CA
(11.29%).
Although the Funds do not have information concerning the beneficial ownership
of shares held in the names of Depository Trust Company (DTC) participants, as
of March 31, 2008, the name and percentage ownership of each DTC participant
that owned a record 5% or more of the outstanding ETF Shares of a Fund were as
follows:
Vanguard Intermediate-Term Bond Index Fund--ETF Shares: Charles Schwab &
Company, Inc. (21.40%), Ameritrade, Inc. (6.14%), National Financial Services
LLC (7.41%), Citigroup Global Markets Inc. (9.77%), Pershing LLC (6.53%),
Merrill Lynch, Pierce Fenner & Smith (9.07%); Vanguard Long-Term Bond Index
Fund--ETF Shares: Morgan Stanley DW Inc. (5.16%), Merrill Lynch, Pierce Fenner &
Smith (14.55%), Charles Schwab & Company Inc. (7.62%), National Financial
Services LLC (9.02%), Citigroup Global Markets Inc. (25.52%), Pershing LLC
(5.30%), Goldman Sachs Execution & Clearing, L.P. (6.43%); Vanguard Short-Term
Bond Index Fund--ETF Shares: Morgan Stanley DW Inc. (15.96%), Charles Schwab &
Company Inc. (22.16%), National Financial Services LLC (8.67%), Merrill Lynch,
Pierce Fenner & Smith
B-31
(5.31%), The Bank of New York (6.35%); Vanguard Total Bond Market Index
Fund--ETF Shares: Charles Schwab & Company Inc. (12.98%), A.G. Edwards & Sons,
Inc. (5.64%), Citibank/Citigroup Private Bank/Trust (16.57%), National Financial
Services LLC (8.14%), Citigroup Global Markets Inc. (5.29%), Pershing LLC
(8.56%), Merrill Lynch, Pierce Fenner & Smith (5.94%).
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
INTRODUCTION
Vanguard and the Boards of Trustees of the Vanguard funds (Boards) have adopted
Portfolio Holdings Disclosure Policies and Procedures (Policies and Procedures)
to govern the disclosure of the portfolio holdings of each Vanguard fund.
Vanguard and the Boards considered each of the circumstances under which
Vanguard fund portfolio holdings may be disclosed to different categories of
persons under the Policies and Procedures. Vanguard and the Boards also
considered actual and potential material conflicts that could arise in such
circumstances between the interests of Vanguard fund shareholders, on the one
hand, and those of the fund's investment advisor, distributor, or any affiliated
person of the fund, its investment advisor, or its distributor, on the other.
After giving due consideration to such matters and after the exercise of their
fiduciary duties and reasonable business judgment, Vanguard and the Boards
determined that the Vanguard funds have a legitimate business purpose for
disclosing portfolio holdings to the persons described in each of the
circumstances set forth in the Policies and Procedures and that the Policies and
Procedures are reasonably designed to ensure that disclosure of portfolio
holdings and information about portfolio holdings is in the best interests of
fund shareholders and appropriately addresses the potential for material
conflicts of interest.
The Boards exercise continuing oversight of the disclosure of Vanguard fund
portfolio holdings by (1) overseeing the implementation and enforcement of the
Policies and Procedures, the Code of Ethics, and the Policies and Procedures
Designed to Prevent the Misuse of Inside Information (collectively, the
portfolio holdings governing policies) by the Chief Compliance Officer of
Vanguard and the Vanguard funds; (2) considering reports and recommendations by
the Chief Compliance Officer concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment
Advisers Act of 1940) that may arise in connection with any portfolio holdings
governing policies; and (3) considering whether to approve or ratify any
amendment to any portfolio holdings governing policies. Vanguard and the Boards
reserve the right to amend the Policies and Procedures at any time and from time
to time without prior notice in their sole discretion. For purposes of the
Policies and Procedures, the term "portfolio holdings" means the equity and debt
securities (e.g., stocks and bonds) held by a Vanguard fund and does not mean
the cash investments, derivatives, and other investment positions (collectively,
other investment positions) held by the fund.
ONLINE DISCLOSURE OF TEN LARGEST STOCK HOLDINGS
Each of the Vanguard equity funds and Vanguard balanced funds generally will
seek to disclose the fund's ten largest stock portfolio holdings and the
percentages that each of these ten largest stock portfolio holdings represent of
the fund's total assets as of the most recent calendar-quarter-end (quarter-end
ten largest stock holdings) online at www.vanguard.com in the "Holdings" section
of the fund's Profile page, 15 calendar days after the end of the calendar
quarter. In addition, those funds generally will seek to disclose the fund's ten
largest stock portfolio holdings as of the most recent month-end (month-end ten
largest stock holdings, and together with quarter-end ten largest stock
holdings, ten largest stock holdings) online at www.vanguard.com in the
"Holdings" section of the fund's Profile page, 10 business days after the end of
the month. Online disclosure of the ten largest stock holdings is made to all
categories of persons, including individual investors, institutional investors,
intermediaries, third-party service providers, rating and ranking organizations,
affiliated persons of a Vanguard fund, and all other persons.
ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS
Each of the Vanguard funds, excluding Vanguard money market funds, generally
will seek to disclose the fund's complete portfolio holdings (complete portfolio
holdings) as of the most recent calendar-quarter-end online at www.vanguard.com
in the "Holdings" section of the fund's Profile page, 30 calendar days after the
end of the calendar quarter. Online disclosure of complete portfolio holdings is
made to all categories of persons, including individual investors, institutional
investors, intermediaries, third-party service providers, rating and ranking
organizations, affiliated persons of a Vanguard fund, and all other persons.
Vanguard's Portfolio Review Department will review complete portfolio holdings
before online disclosure is made as described above and, after consultation with
a Vanguard fund's
B-32
investment advisor, may withhold any portion of the fund's complete portfolio
holdings from online disclosure as described above when deemed to be in the best
interests of the fund.
DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO
CONFIDENTIALITY AND TRADING RESTRICTIONS
Vanguard, for legitimate business purposes, may disclose Vanguard fund complete
portfolio holdings at times it deems necessary and appropriate to rating and
ranking organizations, financial printers, proxy voting service providers,
pricing information vendors, third parties that deliver analytical, statistical,
or consulting services, and other third parties that provide services
(collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the
Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider
is conditioned on the Service Provider being subject to a written agreement
imposing a duty of confidentiality, including a duty not to trade on the basis
of any material nonpublic information.
The frequency with which complete portfolio holdings may be disclosed to a
Service Provider, and the length of the lag, if any, between the date of the
information and the date on which the information is disclosed to the Service
Provider, is determined based on the facts and circumstances, including, without
limitation, the nature of the portfolio holdings information to be disclosed,
the risk of harm to the funds and their shareholders, and the legitimate
business purposes served by such disclosure. The frequency of disclosure to a
Service Provider varies and may be as frequent as daily, with no lag. Disclosure
of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider
must be authorized by a Vanguard fund officer or a Principal in Vanguard's
Portfolio Review or Legal Department. Any disclosure of Vanguard fund complete
portfolio holdings to a Service Provider as described previously may also
include a list of the other investment positions that make up the fund, such as
cash investments and derivatives.
As of March 31, 2007, Vanguard fund complete portfolio holdings are disclosed
to the following Service Providers as part of ongoing arrangements that serve
legitimate business purposes: Abel/Noser Corporation, Advisor Software, Inc.,
Alcom Printing Group Inc., Apple Press, L.C., Broadridge Financial Solutions,
Inc., Brown Brothers Harriman & Co., FactSet Research Systems Inc.,
Intelligencer Printing Company, Investment Technology Group, Inc., Lipper, Inc.,
McMunn Associates Inc., Pitney Bowes Management Services, Reuters America Inc.,
R.R. Donnelley, Inc., State Street Bank and Trust Company, Triune Color
Corporation, and Tursack Printing Inc.
DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN
FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS
Vanguard fund complete portfolio holdings may be disclosed between and among the
following persons (collectively, Affiliates and Fiduciaries) for legitimate
business purposes within the scope of their official duties and
responsibilities, subject to such persons' continuing legal duty of
confidentiality and legal duty not to trade on the basis of any material
nonpublic information, as such duties are imposed under the Code of Ethics, the
Policies and Procedures Designed to Prevent the Misuse of Inside Information, by
agreement, or under applicable laws, rules, and regulations: (1) persons who are
subject to the Code of Ethics or the Policies and Procedures Designed to Prevent
the Misuse of Inside Information; (2) an investment advisor, distributor,
administrator, transfer agent, or custodian to a Vanguard fund; (3) an
accounting firm, an auditing firm or outside legal counsel retained by Vanguard,
a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor to whom
complete portfolio holdings are disclosed for due diligence purposes when the
advisor is in merger or acquisition talks with a Vanguard fund's current
advisor; and (5) a newly hired investment advisor or sub-advisor to whom
complete portfolio holdings are disclosed prior to the time it commences its
duties.
The frequency with which complete portfolio holdings may be disclosed between
and among Affiliates and Fiduciaries, and the length of the lag, if any, between
the date of the information and the date on which the information is disclosed
between and among the Affiliates and Fiduciaries, is determined by such
Affiliates and Fiduciaries based on the facts and circumstances, including,
without limitation, the nature of the portfolio holdings information to be
disclosed, the risk of harm to the funds and their shareholders, and the
legitimate business purposes served by such disclosure. The frequency of
disclosure between and among Affiliates and Fiduciaries varies and may be as
frequent as daily, with no lag. Any disclosure of Vanguard fund complete
portfolio holdings to any Affiliates and Fiduciaries as previously described
above may also include a list of the other investment positions that make up the
fund, such as cash investments and derivatives. Disclosure of Vanguard fund
complete portfolio holdings or other investment positions by Vanguard, Vanguard
Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be
authorized by a Vanguard fund officer or a Principal of Vanguard.
B-33
As of March 31, 2007, Vanguard fund complete portfolio holdings are disclosed
to the following Affiliates and Fiduciaries as part of ongoing arrangements that
serve legitimate business purposes: Vanguard, and each investment advisor,
custodian, and independent registered public accounting firm identified in this
Statement of Additional Information.
DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF
MANAGING A FUND'S ASSETS
An investment advisor, administrator, or custodian for a Vanguard fund may, for
legitimate business purposes within the scope of its official duties and
responsibilities, disclose portfolio holdings (whether partial portfolio
holdings or complete portfolio holdings) and other investment positions that
make up the fund to one or more broker-dealers during the course of, or in
connection with, normal day-to-day securities and derivatives transactions with
or through such broker-dealers subject to the broker-dealer's legal obligation
not to use or disclose material nonpublic information concerning the fund's
portfolio holdings, other investment positions, securities transactions, or
derivatives transactions without the consent of the fund or its agents. The
Vanguard funds have not given their consent to any such use or disclosure and no
person or agent of Vanguard is authorized to give such consent except as
approved in writing by the Boards of the Vanguard funds. Disclosure of portfolio
holdings or other investment positions by Vanguard to broker-dealers must be
authorized by a Vanguard fund officer or a Principal of Vanguard.
DISCLOSURE OF NON-MATERIAL INFORMATION
The Policies and Procedures permit Vanguard fund officers, Vanguard fund
portfolio managers, and other Vanguard representatives (collectively, Approved
Vanguard Representatives) to disclose any views, opinions, judgments, advice or
commentary, or any analytical, statistical, performance, or other information,
in connection with or relating to a Vanguard fund or its portfolio holdings
and/or other investment positions (collectively, commentary and analysis) or any
changes in the portfolio holdings of a Vanguard fund that occurred after the
most recent calendar-quarter end (recent portfolio changes) to any person if (1)
such disclosure serves a legitimate business purpose, (2) such disclosure does
not effectively result in the disclosure of the complete portfolio holdings of
any Vanguard fund (which can be disclosed only in accordance with the Policies
and Procedures), and (3) such information does not constitute material nonpublic
information. Disclosure of commentary and analysis or recent portfolio changes
by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be
authorized by a Vanguard fund officer or a Principal of Vanguard.
An Approved Vanguard Representative must make a good faith determination
whether the information constitutes material nonpublic information, which
involves an assessment of the particular facts and circumstances. Vanguard
believes that in most cases recent portfolio changes that involve a few or even
several securities in a diversified portfolio or commentary and analysis would
be immaterial and would not convey any advantage to a recipient in making an
investment decision concerning a Vanguard fund. Nonexclusive examples of
commentary and analysis about a Vanguard fund include (1) the allocation of the
fund's portfolio holdings and other investment positions among various asset
classes, sectors, industries, and countries; (2) the characteristics of the
stock and bond components of the fund's portfolio holdings and other investment
positions; (3) the attribution of fund returns by asset class, sector, industry,
and country; and (4) the volatility characteristics of the fund. An Approved
Vanguard Representative may in its sole discretion determine whether to deny any
request for information made by any person, and may do so for any reason or for
no reason. "Approved Vanguard Representatives" include, for purposes of the
Policies and Procedures, persons employed by or associated with Vanguard or a
subsidiary of Vanguard who have been authorized by Vanguard's Portfolio Review
Department to disclose recent portfolio changes and/or commentary and analysis
in accordance with the Policies and Procedures.
As of March 31, 2007, Vanguard non-material portfolio holdings information is
disclosed to KPMG, LLP, and R.V. Kuhns & Associates.
DISCLOSURE OF PORTFOLIO HOLDINGS IN ACCORDANCE WITH SEC EXEMPTIVE ORDERS
Vanguard's Fund Financial Services unit may disclose to the National Securities
Clearing Corporation (NSCC) the daily portfolio composition files (PCFs) that
identify a basket of specified securities which may overlap with the actual or
expected portfolio holdings of the Vanguard funds (ETF Funds) that offer a class
of shares known as Vanguard ETF Shares in accordance with the terms and
conditions of related exemptive orders (Vanguard ETF Exemptive Orders) issued by
the Securities and Exchange Commission (SEC), as described further below.
B-34
Unlike the conventional classes of shares issued by ETF Funds, the ETF Shares
are listed for trading on a national securities exchange. Each ETF Fund issues
ETF Shares in large blocks, known as "Creation Units." To purchase or redeem a
Creation Unit, an investor must be an "Authorized Participant" or it must do so
through a broker-dealer that is an Authorized Participant. An Authorized
Participant is a participant in the Depository Trust Company (DTC) that has
executed a Participant Agreement with Vanguard Marketing Corporation. Each ETF
Fund issues Creation Units in exchange for a "portfolio deposit" consisting of a
basket of specified securities (Deposit Securities) and a cash payment (the
Balancing Amount). Each ETF Fund also redeems Creation Units in kind; an
investor who tenders a Creation Unit will receive, as redemption proceeds, a
basket of specified securities together with a Balancing Amount.
In connection with the creation and redemption process, and in accordance with
the terms and conditions of the Vanguard ETF Exemptive Orders, Vanguard makes
available to the NSCC, for dissemination to NSCC participants on each business
day prior to the opening of trading on the exchange, a PCF containing a list of
the names and the required number of shares of each Deposit Security for each
ETF Fund. (The NSCC is a clearing agency registered with the SEC and affiliated
with DTC.) In addition, the exchange disseminates (1) continuously throughout
the trading day, through the facilities of the consolidated tape, the market
value of an ETF Share, and (2) every 15 seconds throughout the trading day,
separately from the consolidated tape, a calculation of the estimated NAV of an
ETF Share (which estimate is expected to be accurate to within a few basis
points). Comparing these two figures allows an investor to determine whether,
and to what extent, ETF Shares are selling at a premium or at a discount to NAV.
ETF Shares are listed on the exchange and traded in the secondary market in the
same manner as other equity securities. The price of ETF Shares trading on the
secondary market is based on a current bid/offer market.
As contemplated by the Vanguard ETF Exemptive Orders, Vanguard and the ETF
Funds expect that only institutional arbitrageurs and institutional investors
with large indexed portfolios will buy and sell ETF Shares in Creation
Unit-sized aggregations because Creation Units can be purchased only in exchange
for securities likely to cost millions of dollars. An exchange specialist, in
providing for a fair and orderly secondary market for ETF Shares, also may
purchase Creation Units for use in its market-making activities on the exchange.
Vanguard and the ETF Funds expect secondary market purchasers of ETF Shares will
include both institutional and retail investors. Vanguard and the ETF Funds
believe that arbitrageurs will purchase or redeem Creation Units to take
advantage of discrepancies between the ETF Shares' market price and the ETF
Shares' underlying NAV. Vanguard and the ETF Funds expect that this arbitrage
activity will provide a market "discipline" that will result in a close
correspondence between the price at which the ETF Shares trade and their NAV. In
other words, Vanguard and the ETF Funds do not expect the ETF Shares to trade at
a significant premium or discount to their NAV.
In addition to making PCFs available to the NSCC, as previously described,
Vanguard's Fund Financial Services unit may disclose the PCF for any ETF Fund to
any person, or online at www.vanguard.com to all categories of persons, if
(1) such disclosure serves a legitimate business purpose and (2) such disclosure
does not constitute material nonpublic information. Vanguard's Fund Financial
Services unit must make a good faith determination whether the PCF for any ETF
Fund constitutes material nonpublic information, which involves an assessment of
the particular facts and circumstances. Vanguard believes that in most cases the
PCF for any ETF Fund would be immaterial and would not convey any advantage to
the recipient in making an investment decision concerning the ETF Fund if
sufficient time has passed between the date of the PCF and the date on which the
PCF is disclosed. Vanguard's Fund Financial Services unit may in its sole
discretion determine whether to deny any request for the PCF for any ETF Fund
made by any person, and may do so for any reason or for no reason. Disclosure of
a PCF must be authorized by a Vanguard fund officer or a Principal in Vanguard's
Fund Financial Services unit.
DISCLOSURE OF PORTFOLIO HOLDINGS RELATED INFORMATION TO THE ISSUER OF A SECURITY
FOR LEGITIMATE BUSINESS PURPOSES
Vanguard, in its sole discretion, may disclose portfolio holdings information
concerning a security held by one or more Vanguard funds to the issuer of such
security if the issuer presents, to the satisfaction of Fund Financial Services,
convincing evidence that the issuer has a legitimate business purpose for such
information. Disclosure of this information to an issuer is conditioned on the
issuer being subject to a written agreement imposing a duty of confidentiality,
including a duty not to trade on the basis of any material nonpublic
information. The frequency with which portfolio holdings information concerning
a security may be disclosed to the issuer of such security, and the length of
the lag, if any, between the date of the information and the date on which the
information is disclosed to the issuer, is determined based on the facts and
circumstances, including, without limitation, the nature of the portfolio
holdings
B-35
information to be disclosed, the risk of harm to the funds and their
shareholders, and the legitimate business purposes served by such disclosure.
The frequency of disclosure to an issuer cannot be determined in advance of a
specific request and will vary based upon the particular facts and circumstances
and the legitimate business purposes, but in unusual situations could be as
frequent as daily, with no lag. Disclosure of portfolio holdings information
concerning a security held by one or more Vanguard funds to the issuer of such
security must be authorized by a Vanguard fund officer or a Principal in
Vanguard's Portfolio Review or Legal Department.
DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW
Vanguard fund portfolio holdings (whether partial portfolio holdings or complete
portfolio holdings) and other investment positions that make up a fund shall be
disclosed to any person as required by applicable laws, rules, and regulations.
Examples of such required disclosure include, but are not limited to, disclosure
of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC
or another regulatory body, (2) in connection with seeking recovery on defaulted
bonds in a federal bankruptcy case, (3) in connection with a lawsuit, or (4) as
required by court order. Disclosure of portfolio holdings or other investment
positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as
required by applicable laws, rules, and regulations must be authorized by a
Vanguard fund officer or a Principal of Vanguard.
PROHIBITIONS ON DISCLOSURE OF PORTFOLIO HOLDINGS
No person is authorized to disclose Vanguard fund portfolio holdings or other
investment positions (whether online at www.vanguard.com, in writing, by fax, by
e-mail, orally, or by other means) except in accordance with the Policies and
Procedures. In addition, no person is authorized to make disclosure pursuant to
the Policies and Procedures if such disclosure is otherwise unlawful under the
antifraud provisions of the federal securities laws (as defined in Rule 38a-1
under the 1940 Act). Furthermore, Vanguard's management, in its sole discretion,
may determine not to disclose portfolio holdings or other investment positions
that make up a Vanguard fund to any person who would otherwise be eligible to
receive such information under the Policies and Procedures, or may determine to
make such disclosures publicly as provided by the Policies and Procedures.
PROHIBITIONS ON RECEIPT OF COMPENSATION OR OTHER CONSIDERATION
The Policies and Procedures prohibit a Vanguard fund, its investment advisor,
and any other person from paying or receiving any compensation or other
consideration of any type for the purpose of obtaining disclosure of Vanguard
fund portfolio holdings or other investment positions. "Consideration" includes
any agreement to maintain assets in the fund or in other investment companies or
accounts managed by the investment advisor or by any affiliated person of the
investment advisor.
INVESTMENT ADVISORY SERVICES
The Funds receive all investment advisory services from Vanguard, through its
Fixed Income Group. These services are provided on an at-cost basis from an
experienced advisory staff employed directly by Vanguard. The compensation and
other expenses of the advisory staff are allocated among the funds utilizing
these services.
During the last three fiscal years, the Funds paid the following approximate
amounts of Vanguard's expenses relating to investment advisory services:
FUND 2005 2006 2007
---- ---- ---- ----
Vanguard Total Bond Market Index Fund $3,470,000 $2,925,000 $3,830,000
Vanguard Short-Term Bond Index Fund 586,000 441,000 463,000
Vanguard Intermediate-Term Bond Index Fund 570,000 511,000 539,000
Vanguard Long-Term Bond Index Fund 172,000 167,000 201,000
Vanguard Inflation-Protected Securities Fund 890,000 779,000 1,260,000
|
OTHER ACCOUNTS MANAGED
Kenneth E. Volpert co-manages the Total Bond Market Index, Intermediate-Term
Bond Index, Long-Term Bond Index, and Inflation-Protected Securities Funds,
which, as of December 31, 2007, collectively held assets of $78.1 billion.
B-36
Mr. Volpert managed or co-managed two other registered investment companies with
total assets of $7.6 billion and co-managed ten other pooled investment vehicles
with total assets of $7.1 billion, as of December 31, 2007.
Gregory Davis manages the Short-Term Bond Index Fund, which, as of December 31,
2007, held assets of $6.5 billion. Mr. Davis co-manages the Total Bond Market
Index and Long-Term Bond Index Funds, which, as of December 31, 2007,
collectively held assets of $58.5 billion. Mr. Davis managed a portion of two
other registered investment company with total assets of $9.9 billion and
co-managed seven other pooled investment vehicles with total assets of $5.9
billion, as of December 31, 2007.
Joshua Barrickman co-manages the Intermediate-Term Bond Index Fund, which, as
of December 31, 2007, held assets of $7.2 billion. Mr. Barrickman managed one
other registered investment company with total assets of $1.3 billion and
co-managed three other pooled investment vehicles with total assets of $1.3
billion, as of December 31, 2007.
John W. Hollyer co-manages the Inflation-Protected Securities Fund, which, as
of December 31, 2007, held assets of $12.4 billion.
MATERIAL CONFLICTS OF INTEREST
At Vanguard, individual portfolio managers may manage multiple accounts for
multiple clients. In addition to mutual funds, these other accounts may include
separate accounts, collective trusts, or offshore funds. Managing multiple
accounts may give rise to potential conflicts of interest, including, for
example, conflicts among investment strategies and conflicts in the allocation
of investment opportunities. Vanguard manages potential conflicts between funds
or with other types of accounts through allocation policies and procedures,
internal review processes, and oversight by directors and independent third
parties. Vanguard has developed trade allocation procedures and controls to
ensure that no one client, regardless of type, is intentionally favored at the
expense of another. Allocation policies are designed to address potential
conflicts in situations where two or more funds or accounts participate in
investment decisions involving the same securities.
DESCRIPTION OF COMPENSATION
Each Fund's portfolio manager is a Vanguard employee. This section describes the
compensation of Vanguard employees who manage Vanguard mutual funds. As of
December 31, 2007, a Vanguard portfolio manager's compensation generally
consists of base salary, bonus, and payments under Vanguard's long-term
incentive compensation program. In addition, portfolio managers are eligible for
the standard retirement benefits and health and welfare benefits available to
all Vanguard employees. Also, certain portfolio managers may be eligible for
additional retirement benefits under several supplemental retirement plans that
Vanguard adopted in the 1980's to restore dollar-for-dollar the benefits of
management employees that had been cut back solely as a result of tax law
changes. These plans are structured to provide the same retirement benefits as
the standard retirement plans.
In the case of portfolio managers responsible for managing multiple Vanguard
funds or accounts, the method used to determine their compensation is the same
for all funds and investment accounts.
A portfolio manager's base salary is determined by the manager's experience and
performance in the role, taking into account the ongoing compensation benchmark
analyses performed by the Vanguard Human Resources Department. A portfolio
manager's base salary is generally a fixed amount that may change as a result of
an annual review, upon assumption of new duties, or when a market adjustment of
the position occurs.
A portfolio manager's bonus is determined by a number of factors. One factor is
gross, pre-tax performance of the fund relative to expectations for how the fund
should have performed, given the fund's investment objective, policies,
strategies, and limitations, and the market environment during the measurement
period. This performance factor is not based on the value of assets held in the
fund's portfolio. For the Total Bond Market, Short-Term Bond, Intermediate-Term
Bond, and Long-Term Bond Index Funds, the performance factor depends on how
closely the portfolio manager tracks the fund's target index (Lehman Brothers
U.S. Aggregate Bond Index for the Total Bond Market Index Fund; Lehman Brothers
1-5 Year U.S. Government/Credit Index for the Short-Term Bond Index Fund; Lehman
Brothers 5-10 Year U.S. Government/Credit Index for the Intermediate-Term Bond
Index Fund; and Lehman Brothers U.S. Long Government/ Credit Index for the
Long-Term Bond Index Fund) over a one-year period. For the Inflation-Protected
Securities Fund, the performance factor depends on how successfully the
portfolio manager outperforms these expectations and maintains the risk
parameters of the fund over a three-year period. Additional factors include the
portfolio manager's contributions to the investment management functions within
the sub-asset class, contributions to the development of other
B-37
investment professionals and supporting staff, and overall contributions to
strategic planning and decisions for the investment group. The target bonus is
expressed as a percentage of base salary. The actual bonus paid may be more or
less than the target bonus, based on how well the manager satisfies the
objectives stated above. The bonus is paid on an annual basis.
Under the long-term incentive compensation program, all full-time employees
receive a payment from Vanguard's long-term incentive compensation plan based on
their years of service, job level and, if applicable, management
responsibilities. Each year, Vanguard's independent directors determine the
amount of the long term incentive compensation award for that year based on the
investment performance of the Vanguard funds relative to competitors and
Vanguard's operating efficiencies in providing services to the Vanguard funds.
OWNERSHIP OF SECURITIES
Vanguard employees, including portfolio managers, allocate their investments
among the various Vanguard funds based on their own individual investment needs
and goals. Vanguard employees as a group invest a sizeable portion of their
personal assets in Vanguard funds. As of December 31, 2007, Vanguard employees
collectively invested $2.2 billion in Vanguard funds. John J. Brennan, Chairman
and Chief Executive Officer of Vanguard and the Vanguard funds, and George U.
Sauter, Managing Director and Chief Investment Officer, invest substantially all
of their personal financial assets in Vanguard funds.
As of December 31, 2007, Mr. Volpert owned shares of the Total Bond Market
Index Fund within the $10,001-$50,000 range. Except as noted in the previous
sentence, as of December 31, 2007, the portfolio managers did not own any shares
of the Bond Index Funds they managed. As of December 31, 2007, Mr. Hollyer owned
shares of the Inflation-Protected Securities Fund within the $100,001-$500,000
range. As of December 31, 2007, Mr. Volpert owned no shares of the
Inflation-Protected Securities Fund.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENT
The Fourth Amended and Restated Funds' Service Agreement, which governs the
at-cost investment advisory services provided to the Funds, will continue in
full force and effect until terminated or amended by mutual agreement of the
Funds and Vanguard.
PORTFOLIO TRANSACTIONS
The advisor decides which securities to buy and sell on behalf of a Fund and
then selects the brokers or dealers that will execute the trades on an agency
basis or the dealers with whom the trades will be effected on a principal basis.
For each trade, the advisor must select a broker-dealer that it believes will
provide "best execution." Best execution does not necessarily mean paying the
lowest spread or commission rate available. In seeking best execution, the SEC
has said that an advisor should consider the full range of a broker-dealer's
services. The factors considered by the advisor in seeking best execution
include, but are not limited to, the broker-dealer's execution capability,
clearance and settlement services, commission rate, trading expertise,
willingness and ability to commit capital, ability to provide anonymity,
financial responsibility, reputation and integrity, responsiveness, access to
underwritten offerings and secondary markets, and access to company management,
as well as the value of any research provided by the broker-dealer. In assessing
which broker-dealer can provide best execution for a particular trade, the
advisor also may consider the timing and size of the order and available
liquidity and current market conditions. Subject to applicable legal
requirements, the advisor may select a broker based partly on brokerage or
research services provided to the advisor and its clients, including the Funds.
The advisor may cause a Fund to pay a higher commission than other brokers would
charge if the advisor determines in good faith that the amount of the commission
is reasonable in relation to the value of services provided. The advisor also
may receive brokerage or research services from broker-dealers that are provided
at no charge in recognition of the volume of trades directed to the broker. To
the extent research services or products may be a factor in selecting brokers,
services and products may include written research reports analyzing performance
or securities, discussions with research analysts, meetings with corporate
executives to obtain oral reports on company performance, market data, and other
products and services that will assist the advisor in its investment
decision-making process. The research services provided by brokers through which
a Fund effects securities transactions may be used by the advisor in servicing
all of its accounts, and some of the services may not be used by the advisor in
connection with a Fund.
B-38
The types of securities in which the Funds invest are generally purchased and
sold through principal transactions, meaning that the Funds normally purchase
securities directly from the issuer or a primary market-maker acting as
principal for the securities on a net basis. Explicit brokerage commissions are
not paid on these transactions, although purchases of new issues from
underwriters of securities typically include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers serving as
market-makers typically include a dealer's mark-up (i.e., a spread between the
bid and the asked prices).
Some securities that are considered for investment by a Fund may also be
appropriate for other Vanguard funds or for other clients served by the advisor.
If such securities are compatible with the investment policies of a Fund and one
or more of the advisor's other clients, and are considered for purchase or sale
at or about the same time, then transactions in such securities will be
aggregated by the advisor and the purchased securities or sale proceeds will be
allocated among the participating Vanguard funds and the other participating
clients of the advisor in a manner deemed equitable by the advisor. Although
there may be no specified formula for allocating such transactions, the
allocation methods used, and the results of such allocations, will be subject to
periodic review by the Funds' board of trustees.
During the fiscal years ended December 31, 2005, 2006, and 2007, the Total Bond
Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond Index Funds
did not pay any brokerage commissions. During the fiscal years ended January 31,
2005, 2006, and 2007, the Inflation-Protected Securities Fund paid $106,289,
$181,296, and $360,000, respectively, in brokerage commissions.
When a Fund purchases a newly issued debt security at a fixed price, the
advisor may designate certain members of the underwriting syndicate to receive
compensation associated with that transaction. Certain dealers have agreed to
rebate a portion of such compensation directly to the Fund to offset the Fund's
management expenses.
As of December 31, 2007, each Fund held securities of its "regular brokers or
dealers," as that term is defined in Rule 10b-1 of the 1940 Act, as follows:
Fund Regular Broker or Dealer (or Parent) Aggregate Holdings
---- ------------------------------------ -----------------
Vanguard Total Bond Market Index Fund Banc of America Securities LLC $246,620,000
Barclays Capital Inc. 9,054,000
Countrywide Securities Corp. 49,098,000
Credit Suisse First Boston Inc. 206,810,000
Deutsche Bank Securities Inc. 113,357,000
Goldman, Sachs & Co. 279,720,000
J.P. Morgan Securities Inc. 361,281,000
Vanguard Short-Term Bond Index Fund Banc of America Securities LLC 35,509,000
Barclays Capital Inc. 5,502,000
Countrywide Securities Corp. 12,013,000
Credit Suisse Securities (USA) LLC 30,014,000
Deutsche Bank Securities Inc. 11,729,000
Goldman, Sachs & Co. 46,069,000
J.P. Morgan Securities Inc. 1,643,000
Vanguard Intermediate-Term Bond Index Fund Banc of America Securities LLC 65,125,000
Countrywide Securities Corp. 2,803,000
Credit Suisse Securities (USA) LLC 38,233,000
Deutsche Bank Securities Inc. 18,977,000
Goldman, Sachs & Co. 100,582,000
J.P. Morgan Securities Inc. 62,125,000
Vanguard Long-Term Bond Index Fund Banc of America Securities LLC 23,229,000
Barclays Capital Inc. 640,000
Credit Suisse Securities (USA) LLC 2,345,000
Goldman, Sachs & Co. 28,999,000
J.P. Morgan Securities Inc. 13,775,000
Vanguard Inflation-Protected Securities Fund -- --
|
B-39
PROXY VOTING GUIDELINES
The Board of Trustees (the Board) of each Vanguard fund that invests in stocks
has adopted proxy voting procedures and guidelines to govern proxy voting by the
fund. The Board has delegated oversight of proxy voting to the Proxy Oversight
Committee (the Committee), made up of senior officers of Vanguard, a majority of
whom are also officers of each Vanguard fund, and subject to the operating
procedures and guidelines described below. The Committee reports directly to the
Board. Vanguard is subject to these guidelines to the extent the guidelines call
for Vanguard to administer the voting process and implement the resulting voting
decisions, and for these purposes have been approved by the Board of Directors
of Vanguard.
The overarching objective in voting is simple: to support proposals and
director nominees that maximize the value of a fund's investments--and those of
fund shareholders--over the long term. While the goal is simple, the proposals
the funds receive are varied and frequently complex. As such, the guidelines
adopted by the Board provide a rigorous framework for assessing each proposal.
Under the guidelines, each proposal must be evaluated on its merits, based on
the particular facts and circumstances as presented.
For ease of reference, the procedures and guidelines often refer to all funds.
However, our processes and practices seek to ensure that proxy voting decisions
are suitable for individual funds. For most proxy proposals, particularly those
involving corporate governance, the evaluation will result in the same position
being taken across all of the funds and the funds voting as a block. In some
cases, however, a fund may vote differently, depending upon the nature and
objective of the fund, the composition of its portfolio, and other factors.
The guidelines do not permit the Board to delegate voting responsibility to a
third party that does not serve as a fiduciary for the funds. Because many
factors bear on each decision, the guidelines incorporate factors the Committee
should consider in each voting decision. A fund may refrain from voting if that
would be in the fund's and its shareholders' best interests. These circumstances
may arise, for example, when the expected cost of voting exceeds the expected
benefits of voting, or exercising the vote results in the imposition of trading
or other restrictions.
In evaluating proxy proposals, we consider information from many sources,
including but not limited to the investment advisor for the fund, management or
shareholders of a company presenting a proposal, and independent proxy research
services. We will give substantial weight to the recommendations of the
company's board, absent guidelines or other specific facts that would support a
vote against management. In all cases, however, the ultimate decision rests with
the members of the Proxy Oversight Committee, who are accountable to the fund's
Board.
While serving as a framework, the following guidelines cannot contemplate all
possible proposals with which a fund may be presented. In the absence of a
specific guideline for a particular proposal (e.g., in the case of a
transactional issue or contested proxy), the Committee will evaluate the issue
and cast the fund's vote in a manner that, in the Committee's view, will
maximize the value of the fund's investment, subject to the individual
circumstances of the fund.
I. THE BOARD OF DIRECTORS
A. ELECTION OF DIRECTORS
Good governance starts with a majority-independent board, whose key committees
are made up entirely of independent directors. As such, companies should attest
to the independence of directors who serve on the Compensation, Nominating, and
Audit committees. In any instance in which a director is not categorically
independent, the basis for the independence determination should be clearly
explained in the proxy statement.
While the funds will generally support the board's nominees, the following
factors will be taken into account in determining each fund's vote:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL
-------------------- ------------------------
Nominated slate results in board made up of a Nominated slate results in board made up of a majority of non-
majority of independent directors. independent directors.
All members of Audit, Nominating, and Compensation Audit, Nominating, and/or Compensation committees include non-
committees are independent of management. independent members.
Incumbent board member failed to attend at least 75% of meetings in
the previous year.
Actions of committee(s) on which nominee serves are inconsistent with
other guidelines (e.g., excessive option grants, substantial non-audit
fees, lack of board independence).
|
B-40
B. CONTESTED DIRECTOR ELECTIONS
In the case of contested board elections, we will evaluate the nominees'
qualifications, the performance of the incumbent board, as well as the rationale
behind the dissidents' campaign, to determine the outcome that we believe will
maximize shareholder value.
C. CLASSIFIED BOARDS
The funds will generally support proposals to declassify existing boards
(whether proposed by management or shareholders), and will block efforts by
companies to adopt classified board structures in which only part of the board
is elected each year.
II. APPROVAL OF INDEPENDENT AUDITORS
The relationship between the company and its auditors should be limited
primarily to the audit, although it may include certain closely related
activities that do not, in the aggregate, raise any appearance of impaired
independence. The funds will generally support management's recommendation for
the ratification of the auditor, except in instances in which audit and
audit-related fees make up less than 50% of the total fees paid by the company
to the audit firm. We will evaluate on a case-by-case basis instances in which
the audit firm has a substantial non-audit relationship with the company
(regardless of its size relative to the audit fee) to determine whether
independence has been compromised.
III. COMPENSATION ISSUES
A. STOCK-BASED COMPENSATION PLANS
Appropriately designed stock-based compensation plans, administered by an
independent committee of the board and approved by shareholders, can be an
effective way to align the interests of long-term shareholders with the
interests of management, employees, and directors. The funds oppose plans that
substantially dilute their ownership interest in the company, provide
participants with excessive awards, or have inherently objectionable structural
features.
An independent compensation committee should have significant latitude to
deliver varied compensation to motivate the company's employees. However, we
will evaluate compensation proposals in the context of several factors (a
company's industry, market capitalization, competitors for talent, etc.) to
determine whether a particular plan or proposal balances the perspectives of
employees and the company's other shareholders. We will evaluate each proposal
on a case-by-case basis, taking all material facts and circumstances into
account.
The following factors will be among those considered in evaluating these
proposals.
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL
-------------------- ------------------------
Company requires senior executives to hold a minimum amount of Total potential dilution (including all stock-based plans)
company stock (frequently expressed as a multiple of salary). exceeds 15% of shares outstanding.
Company requires stock acquired through option exercise to be held Annual option grants have exceeded 2% of shares
for a certain period of time. outstanding.
Compensation program includes performance-vesting awards, indexed Plan permits repricing or replacement of options without
options, or other performance-linked grants. shareholder approval.
Concentration of option grants to senior executives is limited Plan provides for the issuance of reload options.
(indicating that the plan is very broad-based).
Stock-based compensation is clearly used as a substitute for cash in Plan contains automatic share replenishment (evergreen)
delivering market-competitive total pay. feature.
|
B. BONUS PLANS
Bonus plans, which must be periodically submitted for shareholder approval to
qualify for deductibility under Section 162(m) of the IRC, should have clearly
defined performance criteria and maximum awards expressed in dollars. Bonus
plans with awards that are excessive, in both absolute terms and relative to a
comparative group, generally will not be supported.
B-41
C. EMPLOYEE STOCK PURCHASE PLANS
The funds will generally support the use of employee stock purchase plans to
increase company stock ownership by employees, provided that shares purchased
under the plan are acquired for no less than 85% of their market value and that
shares reserved under the plan amount to less than 5% of the outstanding shares.
D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES)
While executives' incentives for continued employment should be more significant
than severance benefits, there are instances--particularly in the event of a
change in control--in which severance arrangements may be appropriate. Severance
benefits triggered by a change in control that do not exceed three times an
executive's salary and bonus may generally be approved by the compensation
committee of the board without submission to shareholders. Any such arrangement
under which the beneficiary receives more than three times salary and bonus--or
where severance is guaranteed absent a change in control--should be submitted
for shareholder approval.
IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS
The exercise of shareholder rights, in proportion to economic ownership, is a
fundamental privilege of stock ownership that should not be unnecessarily
limited. Such limits may be placed on shareholders' ability to act by corporate
charter or by-law provisions, or by the adoption of certain takeover provisions.
In general, the market for corporate control should be allowed to function
without undue interference from these artificial barriers.
The funds' positions on a number of the most commonly presented issues in this
area are as follows:
A. SHAREHOLDER RIGHTS PLANS (POISON PILLS)
A company's adoption of a so-called poison pill effectively limits a potential
acquirer's ability to buy a controlling interest without the approval of the
target's board of directors. Such a plan, in conjunction with other takeover
defenses, may serve to entrench incumbent management and directors. However, in
other cases, a poison pill may force a suitor to negotiate with the board and
result in the payment of a higher acquisition premium.
In general, shareholders should be afforded the opportunity to approve
shareholder rights plans within a year of their adoption. This provides the
board with the ability to put a poison pill in place for legitimate defensive
purposes, subject to subsequent approval by shareholders. In evaluating the
approval of proposed shareholder rights plans, we will consider the following
factors:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL
-------------------- ------------------------
Plan is relatively short-term (3-5 years). Plan is long term (>5 years).
Plan requires shareholder approval Renewal of plan is automatic or does not require shareholder approval.
for renewal.
Plan incorporates review by a committee Ownership trigger is less than 15%.
of independent directors at least
every three years (so-called TIDE
provisions).
Plan includes permitted bid/qualified offer Classified board.
feature (chewable pill) that mandates
shareholder vote in certain situations.
Ownership trigger is reasonable (15-20%). Board with limited independence.
Highly independent, non-classified board.
|
B. CUMULATIVE VOTING
The funds are generally opposed to cumulative voting under the premise that it
allows shareholders a voice in director elections that is disproportionate to
their economic investment in the corporation.
C. SUPERMAJORITY VOTE REQUIREMENTS
The funds support shareholders' ability to approve or reject matters presented
for a vote based on a simple majority. Accordingly, the funds will support
proposals to remove supermajority requirements and oppose proposals to
impose them.
B-42
D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT
The funds support shareholders' right to call special meetings of the board (for
good cause and with ample representation) and to act by written consent. The
funds will generally vote for proposals to grant these rights to shareholders
and against proposals to abridge them.
E. CONFIDENTIAL VOTING
The integrity of the voting process is enhanced substantially when shareholders
(both institutions and individuals) can vote without fear of coercion or
retribution based on their votes. As such, the funds support proposals to
provide confidential voting.
F. DUAL CLASSES OF STOCK
We are opposed to dual class capitalization structures that provide disparate
voting rights to different groups of shareholders with similar economic
investments. We will oppose the creation of separate classes with different
voting rights and will support the dissolution of such classes.
V. CORPORATE AND SOCIAL POLICY ISSUES
Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. The Board
generally believes that these are "ordinary business matters" that are primarily
the responsibility of management and should be evaluated and approved solely by
the corporation's board of directors. Often, proposals may address concerns with
which the Board philosophically agrees, but absent a compelling economic impact
on shareholder value (e.g., proposals to require expensing of stock options),
the funds will typically abstain from voting on these proposals. This reflects
the belief that regardless of our philosophical perspective on the issue, these
decisions should be the province of company management unless they have a
significant, tangible impact on the value of a fund's investment and management
is not responsive to the matter.
VI. VOTING IN FOREIGN MARKETS
Corporate governance standards, disclosure requirements, and voting mechanics
vary greatly among the markets outside the United States in which the funds may
invest. Each fund's votes will be used, where applicable, to advocate for
improvements in governance and disclosure by each fund's portfolio companies. We
will evaluate issues presented to shareholders for each fund's foreign holdings
in the context with the guidelines described above, as well as local market
standards and best practices. The funds will cast their votes in a manner
believed to be philosophically consistent with these guidelines, while taking
into account differing practices by market. In addition, there may be instances
in which the funds elect not to vote, as described below.
Many foreign markets require that securities be "blocked" or reregistered to
vote at a company's meeting. Absent an issue of compelling economic importance,
we will generally not subject the fund to the loss of liquidity imposed by these
requirements.
The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets
may be substantially higher than for U.S. holdings. As such, the fund may limit
its voting on foreign holdings in instances where the issues presented are
unlikely to have a material impact on shareholder value.
VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS
Certain Vanguard funds (owner funds) may, from time to time, own shares of other
Vanguard funds (underlying funds). If an underlying fund submits a matter to a
vote of its shareholders, votes for and against such matters on behalf of the
owner funds will be cast in the same proportion as the votes of the other
shareholders in the underlying fund.
VIII. THE PROXY VOTING GROUP
The Board has delegated the day-to-day operations of the funds' proxy voting
process to the Proxy Voting Group, which the Committee oversees. While most
votes will be determined, subject to the individual circumstances of each fund,
by reference to the guidelines as separately adopted by each of the funds, there
may be circumstances when the Proxy
B-43
Voting Group will refer proxy issues to the Committee for consideration. In
addition, at any time, the Board has the authority to vote proxies, when, in the
Board's or the Committee's discretion, such action is warranted.
The Proxy Voting Group performs the following functions: (1) managing proxy
voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals
using factors described in the guidelines; (4) determining and addressing
potential or actual conflicts of interest that may be presented by a particular
proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and
special reports to the Board, and any proposed amendments to the procedures and
guidelines.
IX. THE PROXY OVERSIGHT COMMITTEE
The Board, including a majority of the independent trustees, appoints the
members of the Committee who are senior officers of Vanguard, a majority of whom
are also officers of each Vanguard fund.
The Committee does not include anyone whose primary duties include external
client relationship management or sales. This clear separation between the proxy
voting and client relationship functions is intended to eliminate any potential
conflict of interest in the proxy voting process. In the unlikely event that a
member of the Committee believes he or she might have a conflict of interest
regarding a proxy vote, that member must recuse him or herself from the
committee meeting at which the matter is addressed, and not participate in the
voting decision.
The Committee works with the Proxy Voting Group to provide reports and other
guidance to the Board regarding proxy voting by the funds. The Committee has an
obligation to conduct its meetings and exercise its decision-making authority
subject to the fiduciary standards of good faith, fairness, and Vanguard's Code
of Ethics. The Committee shall authorize proxy votes that the Committee
determines, in its sole discretion, to be in the best interests of each fund's
shareholders. In determining how to apply the guidelines to a particular factual
situation, the Committee may not take into account any interest that would
conflict with the interest of fund shareholders in maximizing the value of their
investments.
The Board may review these procedures and guidelines and modify them from time
to time. The procedures and guidelines are available on Vanguard's website at
www.vanguard.com.
You may obtain a free copy of a report that details how the funds voted the
proxies relating to the portfolio securities held by the funds for the prior
12-month period ended June 30 by logging on to Vanguard's internet site, at
www.vanguard.com, or the SEC's website at www.sec.gov.
INFORMATION ABOUT THE ETF SHARE CLASS
Vanguard Total Bond Market Index Fund, Vanguard Short-Term Bond Index Fund,
Vanguard Intermediate-Term Bond Index Fund, and Vanguard Long-Term Bond Index
Fund (the ETF Funds or the Funds) offer and issue an exchange-traded class of
shares called ETF Shares. Each ETF Fund issues ETF Shares in large blocks, known
as "Creation Units." To purchase or redeem a Creation Unit, you must be an
Authorized Participant or you must do so through a broker that is an Authorized
Participant. An Authorized Participant is a participant in the Depository Trust
Company (DTC) that has executed a Participant Agreement with Vanguard Marketing
Corporation, the Funds' distributor (the Distributor).
Each ETF Fund issues Creation Units in kind, in exchange for a basket of
securities that are part of--or soon to be part of--its target index (Deposit
Securities). Each ETF Fund also redeems Creation Units in kind; an investor who
tenders a Creation Unit will receive, as redemption proceeds, a basket of
securities that are part of the Fund's portfolio holdings (Redemption
Securities). The Deposit Securities and the Redemption Securities will usually,
but may not necessarily always, be the same. As part of any creation or
redemption transaction, the investor will either pay or receive some cash in
addition to the securities, as described more fully below. Each ETF Fund
reserves the right to issue Creation Units for cash, rather than in kind,
although each has no current intention of doing so.
The ETF Shares have been approved for listing on a national securities exchange
and will trade on the exchange at market prices that may differ from net asset
value. There can be no assurance that, in the future, ETF Shares will continue
to meet all of the exchange's listing requirements. The exchange may, but is not
required to, delist a Fund's ETF Shares from listing if: (1) following the
initial 12-month period beginning upon the commencement of trading, there are
fewer than 50 beneficial owners of the ETF Shares for 30 or more consecutive
trading days; (2) the value of the target index tracked by the Fund is no longer
calculated or available; or (3) such other event shall occur or condition exist
that, in the opinion of the exchange, makes further dealings on the exchange
inadvisable. The exchange will also delist a Fund's ETF Shares upon termination
of the ETF Share class.
B-44
Investors that are not Authorized Participants must hold ETF Shares in a
brokerage account. As with any stock traded on an exchange through a broker,
purchases and sales of ETF Shares will be subject to usual and customary
brokerage commissions.
BOOK ENTRY ONLY SYSTEM
ETF Shares issued by the ETF Funds are registered in the name of the DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, the DTC. The DTC is a
limited-purpose trust company that was created to hold securities of its
participants (DTC Participants) and to facilitate the clearance and settlement
of securities transactions among the DTC Participants in such securities through
electronic book-entry changes in accounts of the DTC Participants, thereby
eliminating the need for physical movement of securities certificates. DTC
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. DTC is a subsidiary of
the depository Trust and Clearing Corporation (DTCC), which is owned by certain
participants of DTCC's subsidiaries, including DTC. Access to the DTC system is
also available to others such as banks, brokers, dealers, and trust companies
that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly (Indirect Participants).
Beneficial ownership of ETF Shares is limited to DTC Participants, Indirect
Participants, and persons holding interests through DTC Participants and
Indirect Participants. Ownership of beneficial interests in ETF Shares (owners
of such beneficial interests are referred to herein as Beneficial Owners) is
shown on, and the transfer of ownership is effected only through, records
maintained by the DTC (with respect to DTC Participants) and on the records of
DTC Participants (with respect to Indirect Participants and Beneficial Owners
that are not DTC Participants). Beneficial Owners will receive from or through
the DTC Participant a written confirmation relating to their purchase of ETF
Shares.
Each ETF Fund recognizes the DTC or its nominee as the record owner of all ETF
Shares for all purposes. Beneficial Owners of ETF Shares are not entitled to
have ETF Shares registered in their names, and will not receive or be entitled
to physical delivery of share certificates. Each Beneficial Owner must rely on
the procedures of the DTC and any DTC Participant and/or Indirect Participant
through which such Beneficial Owner holds its interests, to exercise any rights
of a holder of ETF Shares.
Conveyance of all notices, statements, and other communications to Beneficial
Owners is effected as follows. The DTC will make available to the Trust upon
request and for a fee a listing of the ETF Shares of each Fund held by each DTC
Participant. The Trust shall obtain from each such DTC Participant the number of
Beneficial Owners holding ETF Shares, directly or indirectly, through such DTC
Participant. The Trust shall provide each such DTC Participant with copies of
such notice, statement, or other communication, in such form, number, and at
such place as such DTC Participant may reasonably request, in order that such
notice, statement, or communication may be transmitted by such DTC Participant,
directly or indirectly, to such Beneficial Owners. In addition, the Trust shall
pay to each such DTC Participant a fair and reasonable amount as reimbursement
for the expenses attendant to such transmittal, all subject to applicable
statutory and regulatory requirements.
Share distributions shall be made to the DTC or its nominee as the registered
holder of all ETF Shares. The DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in ETF Shares
of the appropriate Fund as shown on the records of the DTC or its nominee.
Payments by DTC Participants to Indirect Participants and Beneficial Owners of
ETF Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in a "street name,"
and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners; or payments made on account of
beneficial ownership interests in such ETF Shares; or for maintaining,
supervising, or reviewing any records relating to such beneficial ownership
interests; or for any other aspect of the relationship between the DTC and the
DTC Participants or the relationship between such DTC Participants and the
Indirect Participants and Beneficial Owners owning through such DTC
Participants.
The DTC may determine to discontinue providing its service with respect to ETF
Shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for the
DTC to perform its functions at a
B-45
comparable cost or, if such replacement is unavailable, to issue and deliver
printed certificates representing ownership of ETF Shares, unless the Trust
makes other arrangements with respect thereto satisfactory to the exchange.
PURCHASE AND ISSUANCE OF ETF SHARES IN CREATION UNITS
The ETF Funds issue and sell ETF Shares only in Creation Units on a continuous
basis through the Distributor, without a sales load, at their net asset value
next determined after receipt, on any Business Day, of an order in proper form.
The ETF Funds will not issue fractional Creation Units.
A Business Day is any day on which the NYSE is open for business. As of the
date of this Statement of Additional Information, the NYSE observes the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day
(Washington's Birthday), Good Friday, Memorial Day (observed), Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
To be eligible to place orders with the Distributor and to purchase Creation
Units from an ETF Fund, you must be an Authorized Participant, i.e., a DTC
Participant that has executed a Participant Agreement) with the Funds'
Distributor governing the purchase and redemption of Creation Units. Investors
who are not Authorized Participants must make appropriate arrangements with an
Authorized Participant in order to purchase or redeem a Creation Unit. If your
broker is not a DTC Participant or has not executed a Participant Agreement, it
will have to place your order through an Authorized Participant, which may
result in additional charges to you. For a current list of Authorized
Participants, contact the Distributor.
FUND DEPOSIT
The consideration for purchase of a Creation Unit from an ETF Fund generally
consists of the in-kind deposit of a designated portfolio of fixed income
securities (Deposit Securities) and an amount of cash (Cash Component)
consisting of a Purchase Balancing Amount (described below) and a transaction
fee (also described below). Together, the Deposit Securities and the Cash
Component constitute the Fund Deposit.
The Purchase Balancing Amount is an amount equal to the difference between the
net asset value (NAV) of a Creation Unit and the market value of the Deposit
Securities. It ensures that the NAV of a Fund Deposit (not including the
transaction fee) is identical to the NAV of the Creation Unit it is used to
purchase. If the Purchase Balancing Amount is a positive number (i.e., the NAV
per Creation Unit exceeds the market value of the Deposit Securities), then that
amount will be paid by the purchaser to the Fund in cash. If the Purchase
Balancing Amount is a negative number (i.e., the NAV per Creation Unit is less
than the market value of the Deposit Securities), then that amount will be paid
by the Fund to the purchaser in cash (except as offset by the transaction fee,
described below).
Vanguard, through the National Securities Clearing Corporation (NSCC), makes
available after the close of each Business Day, a list of the names and number
of shares of each Deposit Security to be included in the next Business Day's
Fund Deposit for each ETF Fund (subject to possible amendment or correction).
Each ETF Fund reserves the right to accept a nonconforming Fund Deposit. The
identity and number of shares of the Deposit Securities required for a Fund
Deposit may change from one day to another to reflect rebalancing adjustments,
corporate actions, and interest payments on underlying bonds, or in response to
adjustments to the weighting or composition of the component securities of the
relevant target index.
Total Bond Market ETF intends to require an investor purchasing a Creation Unit
to include in the Fund Deposit, in place of all Deposit Securities that are
mortgage TBA (to-be-announced) transactions, an amount of cash, to be added to
the Cash Component, equal in value to the mortgage TBAs. Total Bond Market ETF
reserves the right to require an investor purchasing a Creation Unit late in the
day to include in the Fund Deposit, in place of all Deposit Securities that are
mortgage TBA transactions, Treasury securities of equivalent value and duration,
rather than cash. In addition, each ETF reserves the right to permit or require
the substitution of a "cash-in-lieu" amount to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity
for delivery, may not be eligible for transfer through the systems of the DTC
for corporate bonds or the Federal Reserve System for U.S. Treasury securities,
or may not be eligible for trading by an Authorized Participant or the investor
for which an Authorized Participant is acting.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility, and acceptance for deposit of
any securities to be delivered shall be determined by the appropriate ETF Fund,
and the Fund's determination shall be final and binding.
B-46
PROCEDURES FOR PURCHASING CREATION UNITS
To initiate a purchase order for a Creation Unit, an Authorized Participant must
submit an order in proper form to the Distributor prior to the closing time of
the regular session of the New York Stock Exchange ("Closing Time"), which
ordinarily is 4 p.m. Eastern time. Authorized Participants must transmit orders
using a transmission method acceptable to the Distributor pursuant to procedures
set forth in the Participant Agreement. Neither the Trust, the ETF Funds, the
Distributor, nor any affiliated party will be liable to an investor who is
unable to submit a purchase order by Closing Time, even if the problem is the
responsibility of one of those parties (e.g., the Distributor's phone or e-mail
systems were not operating properly).
If you are not an Authorized Participant, you must place your purchase order
with an Authorized Participant in a form acceptable to such Authorized
Participant. In addition, the Authorized Participant may request that you make
certain representations or enter into agreements with respect to the order,
e.g., to provide for payments of cash when required. You should place your order
with the Authorized Participant sufficiently early to permit proper submission
of the order by the Authorized Participant to the Distributor by Closing Time.
PLACEMENT OF PURCHASE ORDERS
An Authorized Participant must deliver the cash and government securities
portion of a Fund Deposit through the Federal Reserve's Fedwire System and the
corporate securities portion of a Fund Deposit through the DTC. If a Fund
Deposit is incomplete on the third Business Day after the trade date ("T+3")
because of the failed delivery of one or more of the Deposit Securities, the
Fund shall be entitled to cancel the purchase order. Alternatively, the Fund may
issue a Creation Unit of Vanguard ETF Shares notwithstanding such deficiency in
reliance on an Authorized Participant's undertaking to deliver the missing
Deposit Securities, which undertaking shall be secured by the Authorized
Participant's delivery and maintenance of cash collateral in accordance with the
Authorized Participant Agreement.
REJECTION OF PURCHASE ORDERS
Each of the ETF Funds reserves the absolute right to reject a purchase order
transmitted to it by the Distributor. By way of example, and not limitation, an
ETF Fund will reject a purchase order if:
- the order is not in proper form;
- the investor(s), upon obtaining the ETF Shares ordered, would own 80% or more
of the total combined voting power of all classes of stock issued by the Fund;
- the Deposit Securities delivered are not the same (in name or amount) as
disseminated through the facilities of the NSCC for that date by the Custodian,
as described above;
- acceptance of the Deposit Securities would have certain adverse tax
consequences to the Fund;
- acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful;
- acceptance of the Fund Deposit would otherwise, in the discretion of the Fund
or Vanguard, have an adverse effect on the Fund or any of its shareholders; or
- circumstances outside the control of the Funds, the Transfer Agent, the
Custodian, the Distributor, and Vanguard make it for all practical purposes
impossible to process the order. Examples of such circumstances include acts of
God; public service or utility problems such as fires, floods, extreme weather
conditions, and power outages resulting in telephone, telecopy, and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the
aforementioned parties as well as the DTC, NSCC, Federal Reserve, or any other
participant in the purchase process; and similar extraordinary events.
The Distributor shall notify the prospective purchaser of a Creation Unit,
and/or the Authorized Participant acting on the purchaser's behalf, of its
rejection of the purchaser's order. The ETF Funds, the Transfer Agent, the
Custodian, and the Distributor are under no duty, however, to give notification
of any defects or irregularities in the delivery of a Fund Deposit, nor shall
any of them incur any liability for the failure to give any such notification.
TRANSACTION FEE ON PURCHASES OF CREATION UNITS
Each of the ETF Funds imposes a transaction fee (payable to the Fund) to
compensate the Fund for the transfer and other transaction costs associated with
the issuance of Creation Units. For Creation Units of Short-, Intermediate-, and
Long Term Bond ETFs purchased with a prescribed basket, the transaction fee is a
flat fee. For Creation Units of Total Bond
B-47
Market ETF purchased with a Fund Deposit that includes cash in place of mortgage
TBA securities, the transaction fee is a flat fee plus a variable charge, which
will be disclosed to investors before they place their orders, in an amount
approximately equal to the transaction costs the Fund expects to incur buying
the mortgage TBAs that are part of the Fund Deposit. For Creation Units of Total
Bond Market ETF purchased with a Fund Deposit that includes Treasury securities
in place of mortgage TBA securities, the transaction fee will not include a
variable charge. Please see the Funds' ETF Shares prospectus for information
about the current amount of each Fund's transaction fee.
When an ETF Fund permits a purchaser to substitute cash in lieu of depositing
one or more Deposit Securities, the purchaser may be assessed an additional
charge on the cash-in-lieu portion of its investment. The amount of this charge
will vary and will be determined by the Fund in its sole discretion, but shall
not be more than is reasonably needed to compensate the Fund for the transaction
costs, and, if applicable, the estimated market impact costs associated with
purchasing the relevant Deposit Securities using cash-in-lieu provided by an
Authorized Participant.
REDEMPTION OF ETF SHARES IN CREATION UNITS
ETF Shares may be redeemed only in Creation Units; a Fund will not redeem ETF
Shares tendered in less than Creation Unit-size aggregations. Investors should
expect to incur transaction costs in connection with assembling a sufficient
number of ETF Shares to constitute a redeemable Creation Unit. There can be no
assurance, however, that there will be sufficient liquidity in the public
trading market at any time to permit assembly of a Creation Unit. Redemption
requests in good order will receive the NAV next determined after the request is
made.
An investor tendering a Creation Unit generally will receive redemption
proceeds consisting of (1) a basket of Redemption Securities, plus (2) a
Redemption Balancing Amount equal to the difference between (x) the NAV of the
Creation Unit being redeemed, as next determined after receipt of a request in
proper form, and (y) the value of the Redemption Securities, less (3) a
transaction fee (described below). If the Redemption Securities have a value
greater than the NAV of a Creation Unit, the redeeming investor would pay the
Redemption Balancing Amount to the ETF Fund, rather than receiving such amount
from the Fund.
Vanguard, through the NSCC, makes available after the close of each Business
Day a list of the names and the number of shares of each Redemption Security to
be included in the next Business Day's redemption basket (subject to possible
amendment or correction). The basket of Redemption Securities provided to an
investor redeeming a Creation Unit typically, but not always, will be identical
to the basket of Deposit Securities required of an investor purchasing a
Creation Unit. If a Fund and a redeeming investor mutually agree, the Fund may
provide the investor with a basket of Redemption Securities that differs from
the composition of the redemption basket published through the NSCC.
When satisfying redemption requests, Total Bond Market ETF intends to deliver,
in lieu of each mortgage TBA transaction that is a Redemption Security, cash in
an amount equal to the price of the TBA. Total Bond Market ETF reserves the
right to deliver to a shareholder redeeming a Creation Unit late in the day, in
place of all Redemption Securities that are Mortgage TBAs, Treasury securities
of equivalent value and duration, rather than cash. In addition, each ETF Fund
reserves the right to deliver cash in lieu of any Redemption Security for the
same reason it might accept cash in lieu of a Deposit Security, as discussed
above, or if the Fund could not lawfully deliver the security or could not do so
without first registering such security under federal or state law.
TRANSACTION FEES ON REDEMPTIONS OF CREATION UNITS
Each of the ETF Funds imposes a transaction fee (payable to the Fund) to
compensate the Fund for the transfer and other transaction costs associated with
the redemption of Creation Units. For each Fund, the transaction fee on Creation
Unit redemptions is a flat fee, regardless of the number of units redeemed. For
Creation Unit redemptions, unlike purchases, the Total Bond Market ETF does not
assess a variable charge above the standard flat fee, nor do any of the Funds
impose an additional charge on investors who receive cash in lieu of one or more
Redemption Securities. Please see the Funds' ETF Shares prospectus for
information about the current amount of each Fund's transaction fee.
PLACEMENT OF REDEMPTION ORDERS
To initiate a redemption order for a Creation Unit, an Authorized Participant
must submit an order in proper form to the Distributor prior to Closing Time in
order to receive that day's NAV. Authorized Participants must transmit orders
using a transmission method acceptable to the Distributor pursuant to procedures
set forth in the Participant Agreement. Neither the Trust, the ETF Funds, the
Distributor, nor any affiliated party will be liable to an investor who is
unable to
B-48
submit a redemption order by Closing Time, even if the problem is the
responsibility of one of those parties (e.g., the Distributor's phone or e-mail
systems were not operating properly).
If on T+3 an Authorized Participant has failed to deliver all of the Vanguard
ETF Shares it is seeking to redeem, the Fund shall be entitled to cancel the
redemption order. Alternatively, the Fund may deliver to the Authorized
Participant the full complement of Redemption Securities and cash,
notwithstanding such deficiency, in reliance on the Authorized Participant's
undertaking to deliver the missing ETF Shares, which undertaking shall be
secured by the Authorized Participant's delivery and maintenance of cash
collateral in accordance with the Authorized Participant Agreement.
SUSPENSION OF REDEMPTION RIGHTS
The right of redemption may be suspended or the date of payment postponed with
respect to any ETF Fund (1) for any period during which the NYSE or listing
exchange is closed (other than customary weekend and holiday closings); (2) for
any period during which trading on the NYSE or listing exchange is suspended or
restricted; (3) for any period during which an emergency exists as a result of
which disposal of a Fund's ETF Shares or determination of the ETF Shares' NAV is
not reasonably practical; or (4) in such other circumstances as the SEC permits.
FINANCIAL STATEMENTS
Each Fund's Financial Statements for the fiscal year ended December 31, 2007,
appearing in the Funds' 2007 Annual report to Shareholders, and the report
thereon of PricewaterhouseCoopers LLP, an independent registered public
accounting firm, also appearing therein, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of each
Fund's performance, please see the Funds' Annual and Semiannual Reports to
Shareholders, which may be obtained without charge.
DESCRIPTION OF BOND RATINGS
The following are excerpts from Moody's Investors Service, Inc.'s description of
its four highest bond ratings:
Aaa--Judged to be of the best quality. They carry the smallest degree of
investment risk.
Aa--Judged to be of high quality by all standards. Together with the Aaa group
they make up what are generally known as high-grade bonds.
A--Possess many favorable investment attributes and are to be considered as
"upper-medium-grade obligations."
Baa--Considered as medium-grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Moody's also supplies numerical indicators (1, 2, and 3) to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking toward the lower end of the category.
The following are excerpts from Standard & Poor's description of its four
highest bond ratings:
AAA--Highest grade obligations. The capacity to pay interest and repay
principal is extremely strong.
AA--Also qualify as high-grade obligations. They have a strong capacity to pay
interest and repay principal, and they differ from AAA issues only in small
degree.
A--Regarded as upper-medium-grade. They have a strong capacity to pay interest
and repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. This group is the lowest that qualifies for
commercial bank investment.
Standard & Poor's applies indicators ("+" or "-" or no character) to its rating
categories. The indicators show relative standing within the major rating
categories.
B-49
SAI084 042008
B-50
PART C
VANGUARD BOND INDEX FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation, Amended and Restated Agreement and Declaration
of Trust, is filed herewith.
(b) By-Laws, filed on April 13, 2004, Post-Effective Amendment No. 34, are
hereby incorporated by reference.
(c) Instruments Defining Rights of Security Holders, reference is made to
Articles III and V of the Registrant's Amended and Restated Agreement and
Declaration of Trust, refer to Exhibit (a) above.
(d) Investment Advisory Contract, The Vanguard Group, Inc., provides
investment advisory services to the Funds at cost pursuant to the Amended
and Restated Funds' Service Agreement, refer to Exhibit (h) below.
(e) Underwriting Contracts, not applicable.
(f) Bonus or Profit Sharing Contracts, reference is made to the section
entitled "Management of the Funds" in the Registrant's Statement of
Additional Information.
(g) Custodian Agreement for JPMorgan Chase Bank, N.A., is filed herewith.
(h) Other Material Contracts, Amended and Restated Funds' Service Agreement,
is filed herewith. Form of Authorized Participant Agreement, is filed
herewith.
(i) Legal Opinion, not applicable.
(j) Other Opinion, Consent of Independent Registered Public Accounting Firm,
is filed herewith.
(k) Omitted Financial Statements, not applicable.
(l) Initial Capital Agreements, not applicable.
(m) Rule 12b-1 Plan, not applicable.
(n) Rule 18f-3 Plan, is filed herewith.
(o) Reserved, not applicable.
(p) Codes of Ethics, for The Vanguard Group, Inc., filed on January 17, 2007,
Post-Effective Amendment No. 43, is hereby incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Amended and Restated Agreement and Declaration of
Trust provide that the Registrant may indemnify and hold harmless each and every
Trustee and officer from and against any and all claims, demands, costs, losses,
expenses, and damages whatsoever arising out of or related to the performance of
his or her duties as a Trustee or officer. However, this provision does not
cover any liability to which a Trustee or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office. Article VI
of the By-Laws generally provides that the Registrant shall indemnify its
Trustees and officers from any liability arising out of their past or present
service in that capacity. Among other things, this provision excludes any
liability arising by reason of willful misfeasance, bad faith, gross negligence,
or the reckless disregard of the duties involved in the conduct of the Trustee's
or officer's office with the Registrant.
C-2
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Vanguard Group, Inc. ("Vanguard"), is an investment adviser registered under
the Investment Advisers Act of 1940, as amended. The list required by this Item
26 of officers and directors of Vanguard, together with any information as to
any business, profession, vocation, or employment of a substantial nature
engaged in by such officers and directors during the past two years, is
incorporated herein by reference from Schedules B and D of Form ADV filed by
Vanguard pursuant to the Advisers Act (SEC File No. 801-11953).
ITEM 27. PRINCIPAL UNDERWRITERS
(a)Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard
Group, Inc., is the principal underwriter of each fund within the Vanguard group
of investment companies, a family of 37 investment companies with more than 150
funds.
(b)The principal business address of each named director and officer of Vanguard
Marketing Corporation is 100 Vanguard Boulevard, Malvern, PA 19355.
Name Positions and Office with Underwriter Positions and Office with Funds
---- ------------------------------------- -------------------------------
R. Gregory Barton Director and Senior Vice President None
John J. Brennan Director Trustee, Chairman, and Chief Executive Officer
Mortimer J. Buckley Director and Senior Vice President None
F. William McNabb III Director President
Michael S. Miller Director and Managing Director None
Ralph K Packard Director None
George U. Sauter Director and Senior Vice President None
Heidi Stam Director and Senior Vice President Secretary
Richard D. Carpenter Treasurer None
David L. Cermak Principal None
Joseph Colaizzo Financial and Operations Principal and Assistant None
Treasurer
Patti Colby Principal None
Michael L. Kimmel Secretary None
Sean P. Hagerty Principal None
Jack T. Wagner Assistant Treasurer None
Jennifer M. Halliday Assistant Treasurer None
Brian P. McCarthy Senior Registered Options Principal None
Deborah McCracken Assistant Secretary None
Miranda O'Keefe Compliance Registered Options Principal None
Joseph F. Miele Registered Municipal Securities Principal None
Jane K. Myer Principal None
Pauline C. Scalvino Chief Compliance Officer Chief Compliance officer
|
(c)Not Applicable.
C-3
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required by Section 31(a) under the
1940 Act and the Rules thereunder will be maintained at the offices of the
Registrant, 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; the
Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355; and the Registrant's Custodian, JPMorgan Chase
Bank, 270 Park Avenue, New York, NY 10017-2070
ITEM 29. MANAGEMENT SERVICES
Other than as set forth in the section entitled "Management of the Funds" in
Part B of this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 22nd day of April, 2008.
VANGUARD BOND INDEX FUNDS
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
---------------------------------------------------------------------------------
By:----------------------------Chairman, Chief Executive April 22, 2008
/S/ JOHN J. BRENNAN Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:----------------------------Trustee April 22, 2008
/S/ CHARLES D. ELLIS
(Heidi Stam)
Charles D. Ellis*
By:----------------------------Trustee April 22, 2008
/S/ EMERSON U. FULLWOOD
(Heidi Stam)
Emerson U. Fullwood*
By:----------------------------Trustee April 22, 2008
/S/ RAJIV L. GUPTA
(Heidi Stam)
Rajiv L. Gupta*
By:----------------------------Trustee April 22, 2008
/S/ AMY GUTMANN
(Heidi Stam)
Amy Gutmann*
By:----------------------------Trustee April 22, 2008
/S/ JOANN HEFFERNAN HEISEN
(Heidi Stam)
JoAnn Heffernan Heisen*
By:----------------------------Trustee April 22, 2008
/S/ ANDRE F. PEROLD
(Heidi Stam)
Andre F. Perold*
By:----------------------------Trustee April 22, 2008
/S/ ALFRED M. RANKIN, JR.
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:----------------------------Trustee April 22, 2008
/S/ J. LAWRENCE WILSON
(Heidi Stam)
J. Lawrence Wilson*
By:----------------------------Treasurer, Principal Financial April 22, 2008
/S/ THOMAS J. HIGGINS Officer and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
|
* By Power of Attorney. Filed on January 18, 2008, see File Number 2-29601.
Incorporated by Reference.
C-5
INDEX TO EXHIBITS
Articles of Incorporation, Amended and
Restated Agreement and Declaration of Trust. . . . . . . . . . . . . . . Ex-99.A
Custodian Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . Ex-99.G
Other Material Contracts . . . . . . . . . . . . . . . .. . . . . . . . .Ex-99.H
Other Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex-99.J
Rule 18f-3 Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex-99.N
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C-6
Grafico Azioni Vanguard Intermediate Term (AMEX:BIV)
Storico
Da Ago 2024 a Set 2024
Grafico Azioni Vanguard Intermediate Term (AMEX:BIV)
Storico
Da Set 2023 a Set 2024