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. 56 [X]
and  
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 58 [X]
 
VANGUARD BOND INDEX FUNDS  
(Exact Name of Registrant as Specified in Declaration of Trust)  
 
P.O. Box 2600, Valley Forge, PA 19482  
(Address of Principal Executive Office)  
 
Registrant’s Telephone Number (610) 669-1000  
 
Heidi Stam, Esquire  
P.O. Box 876  
Valley Forge, PA 19482  
 
It is proposed that this filing will become effective (check appropriate box)  
[ ] immediately upon filing pursuant to paragraph (b)  
[X ] on April 26, 2011 pursuant to paragraph (b)  
[ ] 60 days after filing pursuant to paragraph (a)(1)  
[ ] on (date) pursuant to paragraph (a)(1)  
[ ] 75 days after filing pursuant to paragraph (a)(2)  
[ ] on (date) pursuant to paragraph (a)(2) of rule 485  
If appropriate, check the following box:  
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.  

 


 

Vanguard Bond Index Funds
Prospectus  
 
April 26, 2011  
 
 
Investor Shares & Admiral™ Shares  
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Vanguard Short-Term Bond Index Fund Investor Shares (VBISX)
Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)
Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX)
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX)
Vanguard Long-Term Bond Index Fund Investor Shares (VBLTX)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Vanguard Fund Summaries   Financial Highlights 40
Total Bond Market Index Fund 1 Investing With Vanguard 48
Short-Term Bond Index Fund 7 Purchasing Shares 48
Intermediate-Term Bond Index Fund 12 Converting Shares 51
Long-Term Bond Index Fund 18 Redeeming Shares 53
Investing in Index Funds 23 Exchanging Shares 56
More on the Funds 24 Frequent-Trading Policy 57
The Funds and Vanguard 35 Other Rules You Should Know 59
Investment Advisor 35 Fund and Account Updates 63
Dividends, Capital Gains, and Taxes 37 Contacting Vanguard 65
Share Price 39 Additional Information 66
    Glossary of Investment Terms 67

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

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

Fees and Expenses

The following table describe s the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

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 None
Account Service Fee (for fund account balances below $10,000) $20/year $20/year
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
  Investor Shares Admiral Shares
Management Expenses 0.19% 0.09%
12b-1 Distribution Fee None None
Other Expenses 0.03% 0.02%
Total Annual Fund Operating Expenses 0. 22% 0.11%

 

1


 

Examples

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year 3 Years 5 Years 10 Years
Investor Shares $ 23 $71 $124 $280
Admiral Shares $11 $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 75%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted 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.

2


 

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 4.37% (quarter ended December 31, 2008), and the lowest return for a quarter was
–2.49% (quarter ended June 30, 2004).

4


 

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
Vanguard Total Bond Market Index Fund Investor Shares      
Return Before Taxes 6.42% 5.72% 5.57%
Return After Taxes on Distributions 5.06 4.07 3.78
Return After Taxes on Distributions and Sale of Fund Shares 4.22 3.92 3.70
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 5.81% 5.84%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 5.80 5.84
      Since
      Inception
      (Nov. 12,
  1 Year 5 Years 2001)
V anguard Total Bond Market Index Fund Admiral Shares      
Return Before Taxes 6.54% 5.82% 5.04%
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 5.81% 5.23%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 5.80 5.23

 

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 individual 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 may differ for each share class. 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.

5


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has managed the Fund since 1992 (co-managed since 2008).

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Investor Shares Admiral Shares
To open and maintain an account $3,000 $10,000
To add to an existing account $100 ( other than by Automatic $100 ( other than by Automatic
  Investment Plan, which Investment Plan, which
  has no established minimum) has no established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

6


 

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.

Fees and Expenses

The following table describe s the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

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 None
Account Service Fee (for fund account balances below $10,000) $20/year $20/year
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
  Investor Shares Admiral Shares
Management Expenses 0.19% 0.09%
12b-1 Distribution Fee None None
Other Expenses 0.03% 0.02%
Total Annual Fund Operating Expenses 0.22% 0 .11%

 

Examples

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

7


 

  1 Year 3 Years 5 Years 10 Years
Investor Shares $23 $71 $124 $280
Admiral Shares $ 11 $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 58%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 1–5 Year Government/ Credit Float Adjusted 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.

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

8


 

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Short-Term Bond Index Fund Investor Shares


 

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).

9


 

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
V anguard Short-Term Bond Index Fund Investor Shares      
Return Before Taxes 3.92% 4.98% 4.61%
Return After Taxes on Distributions 3.03 3.67 3.15
Return After Taxes on Distributions and Sale of Fund Shares 2.60 3.49 3.07
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. 1-5 Year Gov/Credit Float      
Adjusted Index 4.08% 5.06% 4.88%
Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08
Barclays Capital U.S. 1-5 Year Gov/Credit Bond Index 4.08 5.05 4.88
      Since
      Inception
      (Nov. 12,
  1 Year 5 Years 2001)
Vanguard Short-Term Bond Index Fund Admiral Shares      
Return Before Taxes 4.03% 5.07% 4.03%
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. 1-5 Year Gov/Credit Float      
Adjusted Index 4.08% 5.06% 4.25%
Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08
Barclays Capital U.S. 1-5 Year Gov/Credit Bond Index 4.08 5.05 4.25

 

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 individual 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 may differ for each share class. 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.

10


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Manager

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has managed the Fund since 2005.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Investor Shares Admiral Shares
To open and maintain an account $3,000 $10,000
To add to an existing account $100 ( other than by Automatic $100 ( other than by Automatic
  Investment Plan, which Investment Plan, which
  has no established minimum) has no established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

11


 

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.

Fees and Expenses

The following table describe s the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

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 None
Account Service Fee (for fund account balances below $10,000) $20/year $20/year
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
  Investor Shares Admiral Shares
Management Expenses 0.19% 0.09%
12b-1 Distribution Fee None None
Other Expenses 0.03% 0.02%
Total Annual Fund Operating Expenses 0.22% 0 .11%

 

12


 

Examples

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year 3 Years 5 Years 10 Years
Investor Shares $23 $71 $124 $280
Admiral Shares $ 11 $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 46% .

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/ Credit Bond 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.

13


 

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

14


 

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Investor Shares


 

During the periods shown in the bar chart, the highest return for a calendar quarter was 6.83% (quarter ended December 31, 2008), and the lowest return for a quarter was
–3.88% (quarter ended June 30, 2004).

15


 

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
Vanguard Intermediate-Term Bond Index Fund Investor Shares      
Return Before Taxes 9.37% 6.50% 6.50%
Return After Taxes on Distributions 7.78 4.78 4.59
Return After Taxes on Distributions and Sale of Fund Shares 6.18 4.55 4.44
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. 5-10 Year Gov/Credit Float      
Adjusted Index 9.44% 6.45% 6.69%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 6.45 6.69
      Since
      Inception
      (Nov. 12,
  1 Year 5 Years 2001)
V anguard Intermediate-Term Bond Index Fund Admiral Shares      
Return Before Taxes 9.49% 6.60% 5.87%
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. 5-10 Year Gov/Credit Float      
Adjusted Index 9.44% 6.45% 6.01%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 6.45 6.01

 

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 individual 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 may differ for each share class. 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.

16


 

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2008.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Investor Shares Admiral Shares
To open and maintain an account $3,000 $10,000
To add to an existing account $100 ( other than by Automatic $100 ( other than by Automatic
  Investment Plan, which Investment Plan, which
  has no established minimum) has no established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

17


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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
Account Service Fee (for fund account balances below $10,000) $20/year
 
 
Annual Fund Operating Expenses  
(Expenses that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.19%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0.22%

 

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Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$23 $71 $124 $280

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 %.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted 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.

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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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Investor Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

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Annual Total Returns — Vanguard Long-Term Bond Index Fund Investor Shares

 

During the periods shown in the bar chart, the highest return for a calendar quarter was 13.03% (quarter ended December 31, 2008), and the lowest return for a quarter was
–6.16% (quarter ended March 31, 2009).

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
V anguard Long-Term Bond Index Fund Investor Shares      
Return Before Taxes 10.27% 5.93% 7.11%
Return After Taxes on Distributions 8.24 3.97 5.00
Return After Taxes on Distributions and Sale of Fund Shares 6.80 3.91 4.85
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. Long Gov/Credit Float      
Adjusted Index 10.16% 5.92% 7.11%
Barclays Capital U.S. Long Gov/Credit Float Adjusted Index 10.16
Barclays Capital U.S. Long Gov/Credit Bond Index 10.16 5.92 7.11

 

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 individual 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 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.

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Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Gerald Hwang, CFA, Portfolio Manager. He has co-managed the Fund since 2010.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Investor Shares
To open and maintain an account $3,000
To add to an existing account $100 (other than by Automatic Investment Plan,
  which has no established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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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.

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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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 and Admiral Shares (Investor Shares only for Long-Term Bond Index Fund). A separate prospectus offer the Funds’ Signal ® Shares (not available for the Long-Term Bond Index Fund), which are generally for institutional and financial intermediary investors. Another prospectus offers Institutional Shares of the Funds ( not available for the Short-Term Bond Index Fund) and Institutional Plus Shares for the Total Bond Market Index Fund . Institutional Shares are generally for investor s w ho invest a minimum of $5 million (for the Total Bond Market Index Fund) and $25 million (for the Intermediate-Term and Long-Term Bond Index Funds); and Institutional Plus Shares, i f available, are generally for investors who invest a minimum of $100 million . In addition, each Fund issues an exchange-traded class of shares (ETF Shares), which are also offered through a separate prospectus.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses ; as a result, their investment performances will differ.

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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

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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 a target index may be changed only upon 60 days‘ notice to shareholders.

Market Exposure


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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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.

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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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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 .


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.

 

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Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (r edeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 each Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk should be moderate for the Total Bond Market Index Fund, and low for the other funds .


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 nationally recognized statistical rating organizations (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 lo w.

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 restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

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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
Short-Term Bond Index High Low Low 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 bonds 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’s advisor generally 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 relative to its target index. Because the Funds do not hold all the securities in their target indexes, some of the securities (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.


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 the Fund’s target index. Index sampling risk for each Fund should be low.

The Funds are generally managed without regard to tax ramifications.

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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, 2010 .

  Number of Number of Bonds
Fund Bonds Held in Target Inde x
Total Bond Market Index 4,741 8,216
Short-Term Bond Index 1,273 2,287
Intermediate-Term Bond Index 1,079 1,572
Long-Term Bond Index 1,114 1,430

 

Types of bonds. The Total Bond Market Index Fund tracks the Barclays Capital U.S. Aggregate Float Adjusted Index; the Short- Term , Intermediate-T erm , and Long-Term Bond Index Funds track subsets of that Index. Barclays Capital U.S. Aggregate Float Adjusted Index measures the total universe of public, 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, 2010 , 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 4 3.0% 24.1% 27.7% 4.3 % 0.9%              100%
Short-Term Bond Index 71.9 20.8 0.1 6.8 0.4 100
Intermediate-Term            
Bond Index 57.5 36.5 0.1 5.9 0.0 100
Long-Term Bond Index 44.6 43.6 0.0 11.5 0.3 100

 

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.

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

29


 

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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

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 bonds and the prices of U.S. bonds 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.

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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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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.

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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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

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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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies, although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent

33


 

trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance .

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 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 119%, a s reported by Morningstar, Inc., on December 31, 2010 .

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.

 

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The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , Chief Investment Officer and Managing Director of Vanguard.

As Chief Investment Officer, he is responsible for the oversight of Vanguard’s

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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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below.

The managers primarily responsible for the day-to-day management of the Funds are:

Joshua C. Barrickman , CFA, Principal of Vanguar d. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Intermediate-Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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.

Gerald Hwang , CFA, Portfolio Manager. He has worked in investment management since 1993; has managed investment portfolios for Vanguard since 2008; and has co-managed the Long-Term Bond Index Fund since 2010. Education: B.A., Yale University; M.B.A., The Wharton School of the 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 managed the Total Bond Market Index Fund since 1992 (co-managed since 2008 ). E ducation: 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 shares of the Funds.

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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 monthly; capital gains distributions generally occur annually in December. In addition, the Funds may occasionally make a supplemental distribution 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 capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend or short-term capital gains distributions that you receive are taxable to you as ordinary income.

• Any distributions of net long-term capital gains are taxable to you as long-term capital gains, 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 tax return.

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 .

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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.

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.

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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

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Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or 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 2010 with a net asset value (price)
of $10.35 per share. During the year, each Investor Share earned $0.362 from
investment income (interest) and $0.297 from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $0.409 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $10.60, reflecting earnings of $0.659
per share and distributions of $0.409 per share. This was an increase of $0.25 per
share (from $10.35 at the beginning of the year to $10.60 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.42% for the year.
 
As of December 31, 2010 , the Investor Shares had approximately $14.4 billion in
net assets. For the year, the expense ratio was 0.22% ($2.20 per $1,000 of net
assets), and the net investment income amounted to 3.38% of average net
assets. The Fund sold and replaced securities valued at 75% of its net assets.

 

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Total Bond Market Index Fund Investor Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.35 $10.18 $10.16 $9.99 $10.06
Investment Operations          
Net Investment Income .362 .421 .477 .501 .485
Net Realized and Unrealized Gain (Loss)          
on Investments .297 .170 .020 .170 (.070)
Total from Investment Operations .659 .591 .497 .671 .415
Distributions          
Dividends from Net Investment Income (.362) (.421) (.477) (.501) (.485)
Distributions from Realized Capital Gains (.047)
Total Distributions (.409) (.421) (.477) (.501) (.485)
Net Asset Value, End of Period $10.60 $10.35 $10.18 $10.16 $9.99
Total Return 1 6.42% 5.93% 5.05% 6.92% 4.27%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $14,437 $19,555 $29,687 $29,532 $23,769
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.20% 0.19% 0.20%
Ratio of Net Investment Income to          
Average Net Assets 3.38% 4.09% 4.73% 5.02% 4.88%
Turnover Rate 2 75% 3 80% 61% 54% 63%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          
3 Includes 28% that is attributable to mortgage-dollar-roll activity.        

 

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Total Bond Market Index Fund Admiral Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.35 $10.18 $10.16 $9.99 $10.06
Investment Operations          
Net Investment Income .374 .432 .486 .510 .494
Net Realized and Unrealized Gain (Loss)          
on Investments .297 .170 .020 .170 (.070)
Total from Investment Operations .671 .602 .506 .680 .424
Distributions          
Dividends from Net Investment Income (.374) (.432) (.486) (.510) (.494)
Distributions from Realized Capital Gains (.047)
Total Distributions (.421) (.432) (.486) (.510) (.494)
Net Asset Value, End of Period $10.60 $10.35 $10.18 $10.16 $9.99
Total Return 1 6.54% 6.04% 5.15% 7.02% 4.36%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $27,200 $17,932 $12,978 $10,232 $7,900
Ratio of Total Expenses to          
Average Net Assets 0.11% 0.12% 0.11% 0.10% 0.11%
Ratio of Net Investment Income to          
Average Net Assets 3.49% 4.19% 4.82% 5.11% 4.97%
Turnover Rate 2 75% 3 80% 61% 54% 63%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          
3 Includes 28% that is attributable to mortgage-dollar-roll activity.        

 

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Short-Term Bond Index Fund Investor Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.42 $10.28 $10.13 $9.89 $9.92
Investment Operations          
Net Investment Income .229 .293 .389 .456 .426
Net Realized and Unrealized Gain (Loss)          
on Investments .177 .141 .150 .240 (.030)
Total from Investment Operations .406 .434 .539 .696 .396
Distributions          
Dividends from Net Investment Income (.229) (.293) (.389) (.456) (.426)
Distributions from Realized Capital Gains (.047) (.001)
Total Distributions (.276) (.294) (.389) (.456) (.426)
Net Asset Value, End of Period $10.55 $10.42 $10.28 $10.13 $9.89
Total Return 1 3.92% 4.28% 5.43% 7.22% 4.09%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $4,226 $5,283 $3,680 $2,773 $2,731
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to          
Average Net Assets 2.15% 2.78% 3.79% 4.58% 4.32%
Turnover Rate 2 58% 77% 101% 79% 106%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          

 

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Short-Term Bond Index Fund Admiral Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.42 $10.28 $10.13 $9.89 $9.92
Investment Operations          
Net Investment Income .240 .303 .397 .464 .433
Net Realized and Unrealized Gain (Loss)          
on Investments .177 .141 .150 .240 (.030)
Total from Investment Operations .417 .444 .547 .704 .403
Distributions          
Dividends from Net Investment Income (.240) (.303) (.397) (.464) (.433)
Distributions from Realized Capital Gains (.047) (.001)
Total Distributions (.287) (.304) (.397) (.464) (.433)
Net Asset Value, End of Period $10.55 $10.42 $10.28 $10.13 $9.89
Total Return 1 4.03% 4.38% 5.51% 7.31% 4.16%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $3,766 $1,961 $1,632 $1,502 $2,528
Ratio of Total Expenses to          
Average Net Assets 0.11% 0.12% 0.11% 0.10% 0.11%
Ratio of Net Investment Income to          
Average Net Assets 2.26% 2.88% 3.87% 4.66% 4.39%
Turnover Rate 2 58% 77% 101% 79% 106%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          

 

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Intermediate-Term Bond Index Fund Investor Shares        
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.72 $10.50 $10.50 $10.25 $10.36
Investment Operations          
Net Investment Income .448 .474 .498 .507 .499
Net Realized and Unrealized Gain (Loss)          
on Investments .547 .220 .250 (.110)
Total from Investment Operations .995 .694 .498 .757 .389
Distributions          
Dividends from Net Investment Income (.448) (.474) (.498) (.507) (.499)
Distributions from Realized Capital Gains (.057)
Total Distributions (.505) (.474) (.498) (.507) (.499)
Net Asset Value, End of Period $11.21 $10.72 $10.50 $10.50 $10.25
Total Return 1 9.37% 6.79% 4.93% 7.61% 3.91%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $2,378 $3,479 $3,318 $3,020 $2,929
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to          
Average Net Assets 3.97% 4.50% 4.81% 4.74% 4.91%
Turnover Rate 2 46% 72% 89% 72% 86%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          

 

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Intermediate-Term Bond Index Fund Admiral Shares        
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.72 $10.50 $10.50 $10.25 $10.36
Investment Operations          
Net Investment Income .461 .485 .506 .515 .506
Net Realized and Unrealized Gain (Loss)          
on Investments .547 .220 .250 (.110)
Total from Investment Operations 1.008 .705 .506 .765 .396
Distributions          
Dividends from Net Investment Income (.461) (.485) (.506) (.515) (.506)
Distributions from Realized Capital Gains (.057)
Total Distributions (.518) (.485) (.506) (.515) (.506)
Net Asset Value, End of Period $11.21 $10.72 $10.50 $10.50 $10.25
Total Return 1 9.49% 6.89% 5.01% 7.70% 3.98%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $4,623 $2,508 $2,458 $2,308 $3,118
Ratio of Total Expenses to          
Average Net Assets 0.11% 0.12% 0.11% 0.10% 0.11%
Ratio of Net Investment Income to          
Average Net Assets 4.08% 4.60% 4.89% 4.82% 4.98%
Turnover Rate 2 46% 72% 89% 72% 86%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          

 

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Long-Term Bond Index Fund Investor Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $11.56 $11.98 $11.65 $11.53 $11.84
Investment Operations          
Net Investment Income .595 .608 .618 .613 .603
Net Realized and Unrealized Gain (Loss)          
on Investments .583 (.420) .330 .120 (.310)
Total from Investment Operations 1.178 .188 .948 .733 .293
Distributions          
Dividends from Net Investment Income (.595) (.608) (.618) (.613) (.603)
Distributions from Realized Capital Gains (.103)
Total Distributions (.698) (.608) (.618) (.613) (.603)
Net Asset Value, End of Period $12.04 $11.56 $11.98 $11.65 $11.53
Total Return 1 10.27% 1.76% 8.64% 6.59% 2.67%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $2,250 $2,049 $2,518 $2,277 $1,898
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to          
Average Net Assets 4.87% 5.33% 5.49% 5.34% 5.30%
Turnover Rate 2 54% 69% 67% 62% 55%
1 Total returns do not include account service fees that may have applied in the periods shown.    
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.          

 

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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 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. Note that each reference to “you” in this prospectus applies to any one or more registered account owners.

Purchasing Shares

Vanguard reserves the right, without 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.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

Account Minimums for Admiral Shares

To open and maintain an account. $10,000. If you request Admiral Shares when you open a new account, but the investment amount does not meet the account minimum for Admiral Shares, your investment will be placed in Investor Shares of the Fund . Institutional clients should contact Vanguard for information on special eligibility rules that may apply to them.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Policy, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange (the purchase of shares of one Vanguard fund using the

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proceeds of a simultaneous redemption of shares of another Vanguard fund) through our website at van guard.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 call Vanguard to request a purchase of shares in your account . See Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard 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 from a bank account. To establish the electronic bank transfer option on an account, you must designate the 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 from time to time. Your purchase request can be initiated online (if you are a registered user of v anguard.com ), 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

Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an

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exchange online (if you are a registered user of v anguard.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 that 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 generally 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 vanguard.com or see Contacting Vanguard .

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Earning Dividends

You generally 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

Admiral Shares. Please note that Admiral Shares are not available for:

• SIMPLE IRAs and Section 403(b)(7) custodial accounts or

• Other retirement plan accounts receiving special administrative services from Vanguard.

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 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 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 at the time of the conversion. However, the number of shares you own after the conversion

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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 NAVs of the different share classes on the trade date. NAVs are calculated only on days that 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 $10,000, you may ask Vanguard to convert your Investor Shares to Admiral Shares. You can request a conversion online (if you are a registered user of v anguard.com ), by telephone, or by mail. Institutional clients should contact Vanguard for information on special eligibility rules that may apply to them. See Contacting Vanguard .

Automatic conversions. Vanguard conducts periodic reviews of account balances and may, if your account balance in the Fund exceeds $10,000 , 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. Institutional clients should contact Vanguard for information on special eligibility rules that may apply to them.

Conversions to Institutional or Institutional Plus Shares

You are eligible for a self-directed conversion from another share class to Institutional or Institutional Plus S hares of the same Fund ( if available ), provided that your account meets all eligibility requirements. Registered users of our website, v anguard.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 or Institutional Plus S hares 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

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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 Policy , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares and request an exchange (using the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at van guard.com if you are a registered user.

By telephone. You may call Vanguard to request a redemption of shares. 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 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 redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request 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. To establish t he wire redemption option , you generally must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form.

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 v anguard.com ), by telephone, or by mail.

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By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, 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 generally 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 generally 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 generally 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 generally 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 of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally 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

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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.

If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the Fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally will continue earning dividends until the first business day following your trade date. Generally, 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, 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 Policy for information about Vanguard’s policies to limit frequent trading.

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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 up to a 15-day restriction on your ability to request check redemptions online and by telephone. 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 generally requires the written consent of all registered account owners and may require a signature guarantee or a notarized signature . You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange .

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 v anguard.com ), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

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Please note that Vanguard reserves the right, without 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 Policy

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in th e f unds. Each Vanguard fund (other than money market funds and short-term bond funds) 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. ETF Shares are not subject to these frequent-trading limits. The brokerage firm through which you hold your ETF Shares, however, may place certain limits on your ability to purchase and/or sell ETF Shares over any given period .

For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.

The frequent-trading 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 ® .

• 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. (Transaction requests submitted by fax, if otherwise permitted, are not mail transactions and are subject to the policy.)

• Transfers and reregistrations 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,* the frequent-trading policy does not apply to:

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• 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.

• Reregistrations 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, if otherwise permitted, are not mail requests and are subject to the policy.)

* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

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 revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (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, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on client 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.

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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 summary prospectus (or prospectus) and/or shareholder 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 v anguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions online . You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and shareholder reports electronically. If you are a registered user of v anguard.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 online, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

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 ® . 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.

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 owner, or the account.

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Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

Includet he fund name and account number.

Includet he amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must include :

• Signature guarantees or notarized signatures , if required for the type of transaction.

(Call Vanguard for specifi c r equirements.)

• Any supporting documentation that may be required.

The requirements vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without 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 generally 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 or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks.

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Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law.

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 Policy Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Account Service Fee

For most shareholders, Vanguard charges a $20 account service fee on 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 and will be assessed on fund accounts in all Vanguard funds, regardless of a fund’s minimum initial investment amount. The 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 v anguard.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 owned in connection with a Vanguard Brokerage Services ® account.

• Accounts held through intermediaries.

• Accounts held by Voyager, Voyager Select, and Flagship clients . Eligibility is based on total household assets held at Vanguard, with a minimum of $50,0 00 to qualify for Vanguard Voyager Services ® , $500,000 for Vanguard Voyager Select Services ® , and $1 million for Vanguard Flagship Services ® . Vanguard determines eligibility by aggregating assets of all qualifying accounts held by the investor and immediate family members who reside at the same address. Aggregate assets include

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investments in Vanguard mutual funds, Vanguard ETFs ® , certain annuities through Vanguard, the Vanguard 529 Plan, and certain small-business accounts . Assets in employer-sponsored retirement plans for which Vanguard provides recordkeeping services may be included in determining eligibility if the investor also has a personal account holding Vanguard mutual funds. Note that assets held in a Vanguard Brokerage Services account (other than Vanguard funds, including Vanguard ETFs) are not included when determining a household’s eligibility.

• Participant accounts in employer-sponsored defined contribution plans.* Please consult your enrollment materials for the rules that apply to your account.

• Section 529 college savings plans.

* The following Vanguard fund accounts have alternative fee structures: SIMPLE IRAs,

certain Section 403(b)(7) accounts, Vanguard Retirement Investment Program pooled plans, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

Low-Balance Accounts

Each Fund reserves the right to liquidate a fund account whose balance falls below the minimum initial investment for any reason, including market fluctuation. This policy applies to nonretirement fund accounts and accounts that are held through intermediaries.

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if 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 if Vanguard reasonably believe s 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 purchase fee , redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believe s they are deemed to be in the best interest of a fund.

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Share Classes

Vanguard reserves the right, without 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 distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter . 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 Information Statements

For most accounts, we are required to provide annual tax Forms to assist you in preparing your income tax returns. These Forms , which are generally mailed in January, will report the previous year’s dividends, capital gains distributions, proceeds from the sale of shares from taxable accounts, and distributions from IRAs and other retirement plans. Registered users of v anguard.com can also view these Forms online.

Average-Cost Review Statements

For most taxable accounts, an average-cost review statement will accompany the annual Form 1099-B. This statement shows the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, one of the methods established by the IRS and the only method used by

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Vanguard. You may want to consult a tax professional to determine if a different method is best for you.

Annual and Semiannual Reports

We will send (or provide online, whichever you prefer) r eports about Vanguard Bond Index Funds twice a year, in February and August. These 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 a t v anguard.com , in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund, as of the end of the most recent calendar quarter. This list is generally updated within 30 days after the end of each calendar quarte r. V anguard 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.

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Contacting Vanguard

Web

Vanguard.com

24 hours a day, 7 days a week

For the most complete source of Vanguard news

For fund, account, and service information For most account transactions For literature requests

 

Phone

Vanguard Tele-Account ® 800-662-6273 (ON-BOARD)

For automated fund and account information 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

impairment at 800-749-7273)

For literature requests

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) (Text telephone for people with hearing

impairment at 800-749-7273)

For account information For most account 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

I nstitutional Division 888-809-8102

For information and services for large institutional investors Business hours only: Monday–Friday, 8:30 a.m. to 9 p.m., Eastern time

Intermediary Sales Support 800-997-2798

For information and services for financial intermediaries 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

 

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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

 

Additional Information          
 
  Inception Suitable Newspaper Vanguard CUSIP
  Date for IRAs Abbreviation Fund Number Number
Total Bond Market Index Fund          
Investor Shares 12/11/1986 Yes TotBd 84 921937108
Admiral Shares 11/12/2001 Yes TotBdAdml 584 921937603
Short-Term Bond Index Fund          
Investor Shares 3/1/1994 Yes STBond 132 921937207
Admiral Shares 11/12/2001 Yes STBondAdml 5132 921937702
Intermediate-Term Bond Index Fund        
Investor Shares 3/1/1994 Yes ITBond 314 921937306
Admiral Shares 11/12/2001 Yes ITBondAdml 5314 921937801
Long-Term Bond Index Fund          
Investor Shares 3/1/1994 Yes LTBond 522 921937405

 

CFA ® is a trademark owned by CFA Institute.

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Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

67


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index.

An index that reflects the performance of the Barclays Capital U.S. 1–5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

68


 

Spliced Barclays Capital U.S. Long Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Long Government/ Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted Index thereafter.

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.

69


 

P.O. Box 2600
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available free upon request:  
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Additional information about the Funds’ investments is Text telephone for people with hearing impairment:
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to shareholders. In the annual report, you will find a  
  Information Provided by the Securities and
discussion of the market conditions and investment  
  Exchange Commission (SEC)
strategies that significantly affected the Funds’  
  You can review and copy information about the Funds
performance during their last fiscal year.  
  (including the SAI) at the SEC’s Public Reference Room
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The SAI provides more detailed information about service, call the SEC at 202-551-8090. Reports and
the Funds. other information about the Funds are also available in
  the EDGAR database on the SEC’s Internet site at
The SAI and the financial highlights information from  
  s ec.gov, or you can receive copies of this information,
the current annual and semiannual reports a re  
  for a fee, by electronic request at the following e-mail
incorporated by reference into (and are thus legally a  
  address: publicinfo@sec.gov, or by writing the Public
part of) this prospectus.  
  Reference Section, Securities and Exchange
To receive a free copy of the latest annual or semiannual Commission, Washington, DC 20549 -1520 .
report or the SAI, or to request additional information  
  Funds’ Investment Company Act file number: 811-4681
about the Funds or other Vanguard funds, please visit  
v anguard.com or contact us as follows:  
 
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Text telephone for people with hearing impairment:  

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

P 084 042011


 

Vanguard Bond Index Funds
Prospectus
 
April 26, 2011
 
Investor Shares for Participants
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
Vanguard Short-Term Bond Index Fund Investor Shares (VBISX)
Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX)
Vanguard Long-Term Bond Index Fund Investor Shares (VBLTX)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Vanguard Fund Summaries   More on the Funds 18
Total Bond Market Index Fund 1 The Funds and Vanguard 29
Short-Term Bond Index Fund 5 Investment Advisor 29
Intermediate-Term Bond Index Fund 9 Dividends, Capital Gains, and Taxes 31
Long-Term Bond Index Fund 13 Share Price 31
Investing in Index Funds 17 Financial Highlights 33
    Investing With Vanguard 38
    Accessing Fund Information Online 41
    Glossary of Investment Terms 42

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

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

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

 

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.19%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .22%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year                  3 Years 5 Years 10 Years
$ 23 $71 $124 $280

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 75%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted 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.

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates

2


 

before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Investor Shares


 

During the periods shown in the bar chart, the highest return for a calendar quarter was 4.37% (quarter ended December 31, 2008), and the lowest return for a quarter was
–2.49% (quarter ended June 30, 2004).

3


 

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
Vanguard Total Bond Market Index Fund Investor Shares 6.42% 5.72% 5.57%
Comparative Indexes      
(reflect no deduction for fees or expenses)      
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 5.81% 5.84%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 5.80 5.84

 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has managed the Fund since 1992 (co-managed since 2008).

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

4


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.19%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .22%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year 3 Years 5 Years 10 Years
$ 23                         $71 $124 $280

 

5


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 58%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 1–5 Year Government/ Credit Float Adjusted 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.

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

6


 

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Short-Term Bond Index Fund Investor Shares


 

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, 2010    
  1 Year 5 Years 10 Years
Vanguard Short-Term Bond Index Fund Investor Shares 3.92% 4.98% 4.61%
Comparative Indexes      
(reflect no deduction for fees or expenses)      
Spliced Barclays Capital U.S. 1-5 Year Gov/Credit Float      
Adjusted Index 4.08% 5.06% 4.88%
Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08
Barclays Capital U.S. 1-5 Year Gov/Credit Bond Index 4.08 5.05 4.88

 

7


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Manager

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has managed the Fund since 2005.

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

8


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.19%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .22%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 23                           $71 $124 $280

 

9


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 46% .

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/ Credit Bond 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.

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

10


 

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

 

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Investor Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 6.83% (quarter ended December 31, 2008), and the lowest return for a quarter was
–3.88% (quarter ended June 30, 2004).

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
Vanguard Intermediate-Term Bond Index Fund Investor Shares 9.37% 6.50% 6.50%
Comparative Indexes      
(reflect no deduction for fees or expenses)      
Spliced Barclays Capital U.S. 5-10 Year Gov/Credit Float      
Adjusted Index 9.44% 6.45% 6.69%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 6.45 6.69

 

11


 

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2008.

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

12


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.19%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .22%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 23                 $71 $124 $280

 

13


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 %.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Long Government/Credit Float-Adjusted Bond 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.

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

14


 

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 and other comparative indexes, which have investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website a t v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Long-Term Bond Index Fund Investor Shares


 

During the periods shown in the bar chart, the highest return for a calendar quarter was 13.03% (quarter ended December 31, 2008), and the lowest return for a quarter was
–6.16% (quarter ended March 31, 2009).

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
Vanguard Long-Term Bond Index Fund Investor Shares 10.27% 5.93% 7.11%
Comparative Indexes      
(reflect no deduction for fees or expenses)      
Spliced Barclays Capital U.S. Long Gov/Credit Float      
Adjusted Index 10.16% 5.92% 7.11%
Barclays Capital U.S. Long Gov/Credit Float Adjusted Index 10.16
Barclays Capital U.S. Long Gov/Credit Bond Index 10.16 5.92 7.11

 

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Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Gerald Hwang, CFA, Portfolio Manager. He has co-managed the Fund since 2010.

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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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.

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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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 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.

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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


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.

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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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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.

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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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.

 

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


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.

 

Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (r edeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 each Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk should be moderate for the Total Bond Market Index Fund, and low for the other funds .


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.

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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 nationally recognized statistical rating organizations (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.

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 restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

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
Short-Term Bond Index High Low Low Low Low
Intermediate-Term Bond Index Moderate Moderate Low Low Low
Long-Term Bond Index Low High Low Low Low

 

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Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all bonds 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’s advisor generally 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 relative to its target index. Because the Funds do not hold all the securities in their target indexes, some of the securities (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.


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 the Fund’s target index. Index sampling risk for each Fund should be low.

The Funds are generally managed without regard to tax ramifications.

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, 2010 .

  Number of Number of Bonds
Fund Bonds Held in Target Inde x
Total Bond Market Index 4,741 8,216
Short-Term Bond Index 1,273 2,287
Intermediate-Term Bond Index 1,079 1,572
Long-Term Bond Index 1,114   1,430

 

Types of bonds. The Total Bond Market Index Fund tracks the Barclays Capital U.S. Aggregate Float Adjusted Index; the Short- Term , Intermediate-T erm , and Long-Term Bond Index Funds track subsets of that Index. Barclays Capital U.S. Aggregate Float Adjusted Index measures the total universe of public, 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.

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As of December 31, 2010, 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 4 3.0% 24.1% 27.7% 4.3 % 0.9%             100%
Short-Term Bond Index 71.9 20.8 0.1 6.8 0.4 100
Intermediate-Term            
Bond Index 57.5 36.5 0.1 5.9 0.0 100
Long-Term Bond Index 44.6 43.6 0.0 11.5 0.3 100

 

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.

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. Mortgage-backed

23


 

securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

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 bonds and the prices of U.S. bonds 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.

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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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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.

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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 gold, oil, or wheat ), 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 disclosed in this prospectus. The advisor will not use derivatives to change the risk exposure of the Fund. In particular, derivatives will be used only when 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

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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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent

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trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 has 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 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 119%, a s reported by Morningstar, Inc., on December 31, 2010 .

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.

 

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The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , Chief Investment Officer and Managing Director of Vanguard.

As Chief Investment Officer, he is responsible for the oversight of Vanguard’s

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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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below.

The managers primarily responsible for the day-to-day management of the Funds are:

Joshua C. Barrickman , CFA, Principal of Vanguar d. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Intermediate-Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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.

Gerald Hwang , CFA, Portfolio Manager. He has worked in investment management since 1993; has managed investment portfolios for Vanguard since 2008; and has co-managed the Long-Term Bond Index Fund since 2010. Education: B.A., Yale University; M.B.A., The Wharton School of the 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 managed the Total Bond Market Index Fund since 1992 (co-managed since 2008 ). E ducation: 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 shares of the Funds.

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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 monthly; capital gains distributions generally occur annually in December. In addition, the Funds may occasionally make a supplemental distribution 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.

Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

32


 

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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or 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 2010 with a net asset value (price)
of $10.35 per share. During the year, each Investor Share earned $0.362 from
investment income (interest) and $0.297 from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $0.409 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $10.60, reflecting earnings of $0.659
per share and distributions of $0.409 per share. This was an increase of $0.25 per
share (from $10.35 at the beginning of the year to $10.60 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.42% for the year.
 
As of December 31, 2010 , the Investor Shares had approximately $14.4 billion in
net assets. For the year, the expense ratio was 0.22% ($2.20 per $1,000 of net
assets), and the net investment income amounted to 3.38% of average net
assets. The Fund sold and replaced securities valued at 75% of its net assets.

 

33


 

Total Bond Market Index Fund Investor Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.35 $10.18 $10.16 $9.99 $10.06
Investment Operations          
Net Investment Income .362 .421 .477 .501 .485
Net Realized and Unrealized Gain (Loss)          
on Investments .297 .170 .020 .170 (.070)
Total from Investment Operations .659 .591 .497 .671 .415
Distributions          
Dividends from Net Investment Income (.362) (.421) (.477) (.501) (.485)
Distributions from Realized Capital Gains (.047)
Total Distributions (.409) (.421) (.477) (.501) (.485)
Net Asset Value, End of Period $10.60 $10.35 $10.18 $10.16 $9.99
Total Return 6.42% 5.93% 5.05% 6.92% 4.27%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $14,437 $19,555 $29,687 $29,532 $23,769
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.20% 0.19% 0.20%
Ratio of Net Investment Income to          
Average Net Assets 3.38% 4.09% 4.73% 5.02% 4.88%
Turnover Rate 1 75% 2 80% 61% 54% 63%

 

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.

2 Includes 28% that is attributable to mortgage-dollar-roll activity.

34


 

Short-Term Bond Index Fund Investor Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.42 $10.28 $10.13 $9.89 $9.92
Investment Operations          
Net Investment Income .229 .293 .389 .456 .426
Net Realized and Unrealized Gain (Loss)          
on Investments .177 .141 .150 .240 (.030)
Total from Investment Operations .406 .434 .539 .696 .396
Distributions          
Dividends from Net Investment Income (.229) (.293) (.389) (.456) (.426)
Distributions from Realized Capital Gains (.047) (.001)
Total Distributions (.276) (.294) (.389) (.456) (.426)
Net Asset Value, End of Period $10.55 $10.42 $10.28 $10.13 $9.89
Total Return 3.92% 4.28% 5.43% 7.22% 4.09%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $4,226 $5,283 $3,680 $2,773 $2,731
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to          
Average Net Assets 2.15% 2.78% 3.79% 4.58% 4.32%
Turnover Rate 1 58% 77% 101% 79% 106%
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


 

Intermediate-Term Bond Index Fund Investor Shares        
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.72 $10.50 $10.50 $10.25 $10.36
Investment Operations          
Net Investment Income .448 .474 .498 .507 .499
Net Realized and Unrealized Gain (Loss)          
on Investments .547 .220 .250 (.110)
Total from Investment Operations .995 .694 .498 .757 .389
Distributions          
Dividends from Net Investment Income (.448) (.474) (.498) (.507) (.499)
Distributions from Realized Capital Gains (.057)
Total Distributions (.505) (.474) (.498) (.507) (.499)
Net Asset Value, End of Period $11.21 $10.72 $10.50 $10.50 $10.25
Total Return 9.37% 6.79% 4.93% 7.61% 3.91%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $2,378 $3,479 $3,318 $3,020 $2,929
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to          
Average Net Assets 3.97% 4.50% 4.81% 4.74% 4.91%
Turnover Rate 1 46% 72% 89% 72% 86%
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


 

Long-Term Bond Index Fund Investor Shares          
      Year Ended December 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $11.56 $11.98 $11.65 $11.53 $11.84
Investment Operations          
Net Investment Income .595 .608 .618 .613 .603
Net Realized and Unrealized Gain (Loss)          
on Investments .583 (.420) .330 .120 (.310)
Total from Investment Operations 1.178 .188 .948 .733 .293
Distributions          
Dividends from Net Investment Income (.595) (.608) (.618) (.613) (.603)
Distributions from Realized Capital Gains (.103)
Total Distributions (.698) (.608) (.618) (.613) (.603)
Net Asset Value, End of Period $12.04 $11.56 $11.98 $11.65 $11.53
Total Return 10.27% 1.76% 8.64% 6.59% 2.67%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $2,250 $2,049 $2,518 $2,277 $1,898
Ratio of Total Expenses to          
Average Net Assets 0.22% 0.22% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to          
Average Net Assets 4.87% 5.33% 5.49% 5.34% 5.30%
Turnover Rate 1 54% 69% 67% 62% 55%
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.          

 

37


 

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 Participant Services, 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 its policies without 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

Transaction requests (e.g., a contribution, exchange, or redemption) must be in good order. Good order means that Vanguard has determined that (1) your transaction request includes complete information and (2) appropriate assets are already in your account or new assets have been received.

Processing times for your transaction requests may differ among recordkeepers or among transaction types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing timeframes for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

Your transaction will then be based on the next-determined NAV of the Fund‘s Investor Shares. If your transaction request was received in good order before the close of regular trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that day’s NAV and trade date. NAVs are calculated only on days the NYSE is open for trading.

If Vanguard is serving as your plan recordkeeper, and i f your transaction involves one or more investments with an early cut-off time for processing or an other trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

38


 

You generally begin earning dividends on the business day following your contribution trade date. You generally will continue earning dividends until the first business day following your exchange or redemption trade date.

Frequent Trading

The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of 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.

If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount . Please note that the 60-day clock restarts after every exchange out of the fund.

The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax, if otherwise permitted, are not mail requests and are subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased 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; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and 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 the Fund’s prospectus. Contact Vanguard Participant Services, 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 for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at

39


 

the intermediary (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, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor participants’ trading activity with respect to Vanguard funds.

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.

No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.

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 owner, or the account.

Uncashed Checks

Vanguard will not pay interest on uncashed checks.

Portfolio Holdings

We generally post on our website at v anguard.com , in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

40


 

Additional Information        
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Total Bond Market Index Fund        
Investor Shares 12/11/1986 TotBd 84 921937108
Short-Term Bond Index Fund        
Investor Shares 3/01/1994 STBond 132 921937207
Intermediate-Term Bond Index Fund        
Investor Shares 3/01/1994 ITBond 314 921937306
Long-Term Bond Index Fund        
Investor Shares 3/01/1994 LTBond 522 921937405
 
Accessing Fund Information Online    

 

Vanguard Online at V anguard.com

V isit Vanguard’s education-oriented website for access to timely news and information about Vanguard funds and services and easy-to-use, interactive tools to help you create your own investment and retirement strategies.

CFA ® is a trademark owned by CFA Institute.

41


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

42


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index.

An index that reflects the performance of the Barclays Capital U.S. 1–5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

43


 

Spliced Barclays Capital U.S. Long Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Long Government/ Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted Index thereafter.

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.

44


 

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Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information To receive a free copy of the latest annual or semiannual
If you would like more information about Vanguard report or the SAI, or to request additional information
Bond Index Funds, the following documents are about the Funds or other Vanguard funds, please visit
available free upon request: vanguard.com or contact us as follows:
 
Annual/Semiannual Reports to Shareholders The Vanguard Group
Additional information about the Funds’ investments is Participant Services
available in the Funds’ annual and semiannual reports P.O. Box 2900
to shareholders. In the annual report, you will find a Valley Forge, PA 19482-2900
discussion of the market conditions and investment Telephone: 800-523-1188
strategies that significantly affected the Funds’ Text telephone for people with hearing impairment:
performance during their last fiscal year. 800-749-7273
 
Statement of Additional Information (SAI) Information Provided by the Securities and
The SAI provides more detailed information about Exchange Commission (SEC)
the Funds. You can review and copy information about the Funds
  (including the SAI) at the SEC’s Public Reference Room
The SAI and the financial highlights information from  
  in Washington, DC. To find out more about this public
the current annual and semiannual reports a re  
  service, call the SEC at 202-551-8090. Reports and
incorporated by reference into (and are thus legally a  
  other information about the Funds are also available
part of) this prospectus.  
  in the EDGAR database on the SEC’s Internet site
  at 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 20549-1520.
 
  Funds’ Investment Company Act file number: 811-4681

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

I 084 042011


 

Vanguard Bond Index Funds
Prospectus
 
April 26, 2011
 
Signal ® Shares
Vanguard Total Bond Market Index Fund Signal Shares (VBTSX)
Vanguard Short-Term Bond Index Fund Signal Shares (VBSSX)
Vanguard Intermediate-Term Bond Index Fund Signal Shares (VIBSX)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Vanguard Fund Summaries   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 41
Investing in Index Funds 16 Exchanging Shares 45
More on the Funds 17 Frequent-Trading Policy 45
The Funds and Vanguard 28 Other Rules You Should Know 47
Investment Advisor 28 Fund and Account Updates 50
Dividends, Capital Gains, and Taxes 30 Contacting Vanguard 52
Share Price 31 Additional Information 53
Financial Highlights 33 Glossary of Investment Terms 54

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

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

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Signal Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.08%
12b-1 Distribution Fee None
Other Expenses 0.03%
T otal Annual Fund Operating Expenses 0.11%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                             $35 $62 $141

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 75%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted 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.

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates

2


 

before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Signal Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Signal Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Signal Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 4.40% (quarter ended December 31, 2008), and the lowest return for a quarter was
–1.33% (quarter ended December 31, 2010 ).

3


 

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Sep. 1,
  1 Year 2006)
V anguard Total Bond Market Index Fund Signal Shares    
Return Before Taxes 6.54% 6.22%
Return After Taxes on Distributions 5.14 4.56
Return After Taxes on Distributions and Sale of Fund Shares 4.30 4.34
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 6.19%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 6.18

 

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 individual 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 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.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has managed the Fund since 1992 (co-managed since 2008).

4


 

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (v anguard.com ), by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). Signal Shares generally are available to certain institutional and financial intermediary clients with no minimum initial or subsequent investment requirements.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

5


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Signal Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.08%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0. 11%

 

6


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                      $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 58%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 1–5 Year Government/ Credit Float Adjusted 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.

7


 

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Signal Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Signal Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

8


 

A nnual Total Returns — Vanguard Short-Term Bond Index Fund Signal Shares


 

 

During the periods shown in the bar chart, the highest return for a calendar quarter was 3.73% (quarter ended December 31, 2008), and the lowest return for a quarter was
–1.07% (quarter ended June 30, 2008).

Average Annual Total Returns for Periods Ended December 31, 2010

    Since
    Inception
    (Mar. 30,
  1 Year 2007)
Vanguard Short-Term Bond Index Fund Signal Shares    
Return Before Taxes 4.03% 5.22%
Return After Taxes on Distributions 3.11 3.97
Return After Taxes on Distributions and Sale of Fund Shares 2.67 3.73
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08% 5.19%
Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08
Barclays Capital U.S. 1-5 Year Gov/Credit Bond Index 4.08 5.18

 

9


 

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 individual 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 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.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Manager

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has managed the Fund since 2005.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (v anguard.com ), by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). Signal Shares generally are available to certain institutional and financial intermediary clients with no minimum initial or subsequent investment requirements.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

10


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Signal Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.08%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .11%

 

11


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                           $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 46% .

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/ Credit Bond 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.

12


 

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Signal Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Signal Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

13


 

 

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Signal Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 6.85% (quarter ended December 31, 2008), and the lowest return for a quarter was
–2.92% (quarter ended December 31, 2010 ).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Jun. 4,
  1 Year 2007)
V anguard Intermediate-Term Bond Index Fund Signal Shares    
Return Before Taxes 9.49% 7.90%
Return After Taxes on Distributions 7.85 6.16
Return After Taxes on Distributions and Sale of Fund Shares 6.26 5.74
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44% 7.75%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 7.74

 

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 individual 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 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.

14


 

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2008.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website (v anguard.com ), by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). Signal Shares generally are available to certain institutional and financial intermediary clients with no minimum initial or subsequent investment requirements.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 institutional and financial intermediary investors. A separate prospectus offers the Funds’ Institutional Shares (except for the Short-Term Bond Index Fund) and Institutional Plus Shares (for the Total Bond Market Index Fund only), which are generally for investors who invest a minimum of $5 million (for the Total Bond Market Index Fund Institutional Shares), $25 million (for the Intermediate-Term and Long-Term Bond Index Funds Institutional Shares), and $100 million (for the Total Bond Market Index Fund Institutional Plus Shares). Another prospectus offers the Funds’ Investor Shares and Admiral™ Shares, which have investment minimums of $3,000 and $10,000, respectively. In addition, each Fund issues an exchange-traded class of shares (ETF Shares), which are also offered through a separate prospectus .

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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

17


 

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


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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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.

18


 

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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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 .


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.


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (r edeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 each Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk should be moderate for the Total Bond Market Index Fund, and low for the other funds .


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 nationally recognized statistical rating organizations (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 lo w.

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 restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

20


 

The following summary table is provided to help you distinguish among the Funds and their various risks.

Risks of the Funds          
      Call/   Index
    Interest Prepayment Credit Sampling
Fund Income Risk Rate 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 Index Moderate Moderate Low Low Low

 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all bonds 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’s advisor generally 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.


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 the Fund’s target index. Index sampling risk for each Fund should be low.

The Funds are generally managed without regard to tax ramifications.

The following table shows the number of bonds held by each Fund, as well as the number of bonds in each Fund’s target i ndex, as of December 31, 2010 .

  Number of Number of Bonds in
Fund Bonds Held Target Index
Total Bond Market Index 4 ,741 8,216
Short-Term Bond Index 1,273 2,287
Intermediate-Term Bond Index 1,079 1,572

 

21


 

Types of bonds. The Total Bond Market Index Fund tracks the Barclays Capital U.S. Aggregate Float Adjusted Index; the Short-Term and Intermediate-Term Bond Index Funds track subsets of that Index. Barclays Capital U.S. Aggregate Float Adjusted Index measures the total universe of public, 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, 2010 , 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 4 3.0% 24.1% 27.7% 4.3% 0.9%            100%
Short-Term Bond Index 71.9 20.8 0.1 6.8 0.4 100
Intermediate-Term            
Bond Index 57.5 36.5 0.1 5.9 0.0 100

 

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.

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

22


 

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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

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 bonds and the prices of U.S. bonds 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.

23


 

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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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.

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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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

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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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent

26


 

trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance .

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 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 119%, a s reported by Morningstar, Inc., on December 31, 2010 .

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.

 

27


 

The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , Chief Investment Officer and Managing Director of Vanguard.

As Chief Investment Officer, he is responsible for the oversight of Vanguard’s

28


 

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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below.

The managers primarily responsible for the day-to-day management of the Funds are:

Joshua C. Barrickman , CFA, Principal of Vanguar d. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Intermediate-Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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.

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 managed the Total Bond Market Index Fund since 1992 (co-managed since 2008 ). E ducation: 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 shares of the Funds.

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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 monthly; capital gains distributions generally occur annually in December. In addition, the Funds may occasionally 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 capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income.

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

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.

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.

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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.

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.

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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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.

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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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or 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 2010 with a net asset value (price)
of $10.35 per share. During the year, each Signal Share earned $0.374 from
investment income (interest) and $0.297 from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $0.421 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $10.60, reflecting earnings of $0.671
per share and distributions of $0.421 per share. This was an increase of $0.25 per
share (from $10.35 at the beginning of the year to $10.60 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.54% for the year.
 
As of December 31, 2010 , the Signal Shares had approximately $8.8 billion in net
assets. For the year, the expense ratio was 0.11% ($1.10 per $1,000 of net
assets), and the net investment income amounted to 3.49% of average net
assets. The Fund sold and replaced securities valued at 75% of its net assets.

 

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Total Bond Market Index Fund Signal Shares          
          Sept. 1,
          2006 1 to
    Year Ended December 31,  
          Dec. 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.35 $10.18 $10.16 $9.99 $9.94
Investment Operations          
Net Investment Income .374 .432 .486 .510 .166
Net Realized and Unrealized Gain (Loss) on          
Investments .297 .170 .020 .170 .050
Total from Investment Operations .671 .602 .506 .680 .216
Distributions          
Dividends from Net Investment Income (.374) (.432) (.486) (.510) (.166)
Distributions from Realized Capital Gains (.047)
Total Distributions (.421) (.432) (.486) (.510) (.166)
Net Asset Value, End of Period $10.60 $10.35 $10.18 $10.16 $9.99
Total Return 6.54% 6.04% 5.15% 7.02% 2.18%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $8,813 $8,450 $7,372 $5,414 $632
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.11% 0.10% 0.11% 2
Ratio of Net Investment Income to Average Net          
Assets 3.49% 4.19% 4.82% 5.11% 4.97% 2
Turnover Rate 3 75% 4 80% 61% 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.          
4 Includes 28% that is attributable to mortgage-dollar-roll activity.        

 

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Short-Term Bond Index Fund Signal Shares        
        March 30,
        2007 1 to
  Year Ended December 31,  
        Dec. 31,
  2010 2009 2008 2007
Net Asset Value, Beginning of Period $10.42 $10.28 $10.13 $9.93
Investment Operations        
Net Investment Income .240 .303 .397 .352
Net Realized and Unrealized Gain (Loss) on Investments .177 .141 .150 .200
Total from Investment Operations .417 .444 .547 .552
Distributions        
Dividends from Net Investment Income (.240) (.303) (.397) (.352)
Distributions from Realized Capital Gains (.047) (.001)
Total Distributions (.287) (.304) (.397) (.352)
Net Asset Value, End of Period $10.55 $10.42 $10.28 $10.13
Total Return 4.03% 4.38% 5.51% 5.67%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $6,987 $5,080 $3,212 $1,851
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.11% 0.10% 2
Ratio of Net Investment Income to Average Net Assets 2.26% 2.88% 3.87% 4.66% 2
Turnover Rate 3 58% 77% 101% 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
  Year Ended December 31,  
        Dec. 31,
  2010 2009 2008 2007
Net Asset Value, Beginning of Period $10.72 $10.50 $10.50 $10.12
Investment Operations        
Net Investment Income .461 .485 .506 .297
Net Realized and Unrealized Gain (Loss) on Investments .547 .220 .380
Total from Investment Operations 1.008 .705 .506 .677
Distributions        
Dividends from Net Investment Income (.461) (.485) (.506) (.297)
Distributions from Realized Capital Gains (.057)
Total Distributions (.518) (.485) (.506) (.297)
Net Asset Value, End of Period $11.21 $10.72 $10.50 $10.50
Total Return 9.49% 6.89% 5.01% 6.77%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $2,255 $1,918 $1,720 $1,443
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.11% 0.10% 2
Ratio of Net Investment Income to Average Net Assets 4.08% 4.60% 4.89% 4.82% 2
Turnover Rate 3 46% 72% 89% 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.        

 

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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 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. Note that each reference to “you” in this prospectus applies to any one or more registered account owners.

Purchasing Shares

Vanguard reserves the right, without 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 accoun t.

Institutional clients and institutional intermediary 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 without restriction. Signal Shares generally are not available to financial intermediaries that serve as mutual fund supermarkets.

Institutional clients whose accounts are recordkept by Vanguard . Institutional clients whose accounts are recordkept by Vanguard generally may hold Signal Shares if they have $5 million or more in the Fund or in certain other situations. Vanguard may charge additional recordkeeping fees. Please contact your Vanguard representative to determine whether additional recordkeeping fees apply to your accounts.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Policy, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange (the purchase of shares of one Vanguard fund using the

37


 

proceeds of a simultaneous redemption of shares of another Vanguard fund) through our website at van guard.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 call Vanguard to request a purchase of shares in your account . See Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard 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 from a bank account. To establish the electronic bank transfer option on an account, you must designate the 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 from time to time. Your purchase request can be initiated online (if you are a registered user of v anguard.com ), 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

Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are a registered user of v anguard.com ), by telephone, or by mail. See Exchanging Shares .

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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 that 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 generally 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 vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally 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

39


 

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 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 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 at the time of the conversion. 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

40


 

the NAVs of the different share classes on the trade date. NAVs are calculated only on days that 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. You may contact Vanguard by telephone or by mail to request this transaction. Vanguard may automatically convert accounts holding Investor Shares that qualify for conversion to Signal Shares. Vanguard will notify the investor in writing before any automatic conversion to Signal Shares.

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 Share s.

Conversions to Institutional or Institutional Plus Shares

You are eligible for a self-directed conversion from another share class to Institutional or Institutional Plus S hares of the same Fund (if available) , provided that your account meets all eligibility requirements. Registered users of our website, v anguard.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 or Institutional Plus S hares will not be automatically converted.

R edeeming Shares

How to Initiate a Redemption Request

Be sure to check Exchanging Shares, Frequent-Trading Policy , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares and request an exchange (using the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at van guard.com if you are a registered user.

By telephone. You may call Vanguard to request a redemption of shares. See

Contacting Vanguard .

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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 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 redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request 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. To establish t he wire redemption option , you generally must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form.

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 v anguard.com ), by telephone, or by mail.

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, 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.

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• 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 generally 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 generally 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 generally 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 generally 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 of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally 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 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. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the Fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

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Earning Dividends

You generally will continue earning dividends until the first business day following your trade date. Generally, 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, 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 Policy 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 up to a 15-day restriction on your ability to request check redemptions online and by telephone. 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 generally requires the written consent of all registered account owners and may require a signature guarantee or a notarized

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signature. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange .

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 v anguard.com ), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Please note that Vanguard reserves the right, without 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 Policy

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in th e f unds. Each Vanguard fund (other than money market funds and short-term bond funds) 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. ETF Shares are not subject to these frequent-trading limits. The brokerage firm through which you hold your ETF Shares, however, may place certain limits on your ability to purchase and/or sell ETF Shares over any given period .

For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.

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The frequent-trading 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 ® .

• 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. (Transaction requests submitted by fax, if otherwise permitted, are not mail transactions and are subject to the policy.)

• Transfers and reregistrations 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,* 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.
  • Reregistrations 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, if otherwise permitted, are not mail requests and are subject to the policy.)

* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

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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 revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (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, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on client 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 summary prospectus (or prospectus) and/or shareholder 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 v anguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions online . You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and shareholder reports electronically. If you are a registered user of

47


 

v anguard.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 online, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

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 ® . 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.

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 owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instruction s:

Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

Includet he fund name and account number.

Includet he amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must include :

• Signature guarantees or notarized signatures , if required for the type of transaction.

(Call Vanguard for specifi c r equirements.)

• Any supporting documentation that may be required.

The requirements vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without notice, to revise the requirements for good order.

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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 generally 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 or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law.

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 Policy Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

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Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if 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 if Vanguard reasonably believe s 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 purchase fee , redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believe s they are deemed to be in the best interest of a fund.

Share Classes

Vanguard reserves the right, without 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

50


 

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 quarter . 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 Information Statements

For most accounts, we are required to provide annual tax Forms to assist you in preparing your income tax returns. These Forms , which are generally mailed in January, will report the previous year’s dividends, capital gains distributions, proceeds from the sale of shares from taxable accounts, and distributions from IRAs and other retirement plans. Registered users of v anguard.com can also view these Forms online.

Average-Cost Review Statements

For most taxable accounts, an average-cost review statement will accompany the annual Form 1099-B. This statement shows the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, one of the methods established by the IRS and the only method used by Vanguard. You may want to consult a tax professional to determine if a different method is best for you.

Annual and Semiannual Reports

We will send (or provide online, whichever you prefer) r eports about Vanguard Bond Index Funds twice a year, in February and August. These 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 vanguard.com , in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund, as of the end of the most recent calendar quarter. 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.

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Contacting Vanguard

Web

Vanguard.com

24 hours a day, 7 days a week

For the most complete source of Vanguard news

For fund, account, and service information For most account transactions For literature requests

 

Phone

Vanguard Tele-Account ® 800-662-6273 (ON-BOARD)

For automated fund and account information 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

impairment at 800-749-7273)

For literature requests

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) (Text telephone for people with hearing

impairment at 800-749-7273)

For account information For most account 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

Signal Service Centers

For information regarding Signal Shares For most Signal Share transactions

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 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 888-809-8102

For information and services for large institutional investors Business hours only: Monday–Friday, 8:30 a.m. to 9 p.m., Eastern time

Intermediary Sales Support 800-997-2798

For information and services for financial intermediaries 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

 

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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

 

Additional Information        
 
 
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Total Bond Market Index Fund        
Signal Shares 9/1/2006 TotBdSgl 1351 921937868
  (Investor Shares      
12/11/1986)

Short-Term Bond Index Fund        
Signal Shares 3/30/2007 STBondSgl 1349 921937850
  (Investor Shares      
3/1/1994)

Intermediate-Term Bond Index Fund        
Signal Shares 6/4/2007 ITBondSgl 1350 921937843
  (Investor Shares      
3/1/1994)

 

CFA ® is a trademark owned by CFA Institute.

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Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

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.

54


 

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index.

An index that reflects the performance of the Barclays Capital U.S. 1–5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

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.

55


 

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Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information If you are a client of Vanguard’s Institutional Division:
If you would like more information about Vanguard The Vanguard Group
Bond Index Funds, the following documents are Institutional Investor Information Department
available free upon request: P.O. Box 2900
  Valley Forge, PA 19482-2900
Annual/Semiannual Reports to Shareholders  
  Telephone: 888-809-8102; Text telephone for people
Additional information about the Funds’ investments is  
  with hearing impairment: 800-749-7273
available in the Funds’ annual and semiannual reports  
to shareholders. In the annual report, you will find a If you are a current Vanguard shareholder and would
discussion of the market conditions and investment like information about your account, account
strategies that significantly affected the Funds’ transactions, and/or account statements, please call:
performance during their last fiscal year.  
  Client Services Department
Statement of Additional Information (SAI) Telephone: 800-662-2739 (CREW); Text telephone for
The SAI provides more detailed information about the Funds. people with hearing impairment: 800-749-7273
 
The SAI and the financial highlights information from Information Provided by the Securities and
the current annual and semiannual reports a re Exchange Commission (SEC)
incorporated by reference into (and are thus legally a You can review and copy information about the Fund s
part of) this prospectus. (including the SAI) at the SEC’s Public Reference Room
  in Washington, DC. To find out more about this public
To receive a free copy of the latest annual or semiannual  
  service, call the SEC at 202-551-8090. Reports and
report or the SAI, or to request additional information  
  other information about the Funds are also available in
about the Funds or other Vanguard funds, please visit  
  the EDGAR database on the SEC’s Internet site at
v anguard.com or contact us as follows:  
  sec.gov, or you can receive copies of this information,
If you are an individual investor: for a fee, by electronic request at the following e-mail
The Vanguard Group address: publicinfo@sec.gov, or by writing the Public
Investor Information Department Reference Section, Securities and Exchange
P.O. Box 2900 Commission, Washington, DC 20549-1520.
Valley Forge, PA 19482-2900  
  Funds’ Investment Company Act file number: 811-4681
Telephone: 800-662-7447 (SHIP); Text telephone for  
people with hearing impairment: 800-749-7273  

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

P 1351 042011


 

Vanguard Bond Index Funds
Prospectus
 
April 26, 2011
 
Signal ® Shares for Participants
Vanguard Total Bond Market Index Fund Signal Shares (VBTSX)
Vanguard Short-Term Bond Index Fund Signal Shares (VBSSX)
Vanguard Intermediate-Term Bond Index Fund Signal Shares (VIBSX)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Vanguard Fund Summaries   More on the Funds 16
Total Bond Market Index Fund 1 The Funds and Vanguard 26
Short-Term Bond Index Fund 5 Investment Advisor 27
Intermediate-Term Bond Index Fund 10 Dividends, Capital Gains, and Taxes 28
Investing in Index Funds 15 Share Price 29
    Financial Highlights 30
    Investing With Vanguard 34
    Accessing Fund Information Online 37
    Glossary of Investment Terms 38

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

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

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Signal Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.08%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .11%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year             3 Years 5 Years 10 Years
$ 11 $35 $62 $141

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 75%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted 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.

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates

2


 

before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Signal 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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Signal Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 4.40% (quarter ended December 31, 2008), and the lowest return for a quarter was
–1.33% (quarter ended December 31, 2010 ).

3


 

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Sep. 1,
  1 Year 2006)
Vanguard Total Bond Market Index Fund Signal Shares 6.54% 6.22%
Comparative Indexes    
(reflect no deduction for fees or expenses)    
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 6.19%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
B arclays Capital U.S. Aggregate Bond Index 6.54 6.18

 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has managed the Fund since 1992 (co-managed since 2008).

T ax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

4


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Signal Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.08%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .11%

 

5


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                      $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 58%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 1–5 Year Government/ Credit Float Adjusted 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.

6


 

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Signal 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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at va nguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

7


 

 

Annual Total Returns — Vanguard Short-Term Bond Index Fund Signal Shares


 

During the periods shown in the bar chart, the highest return for a calendar quarter was 3.73% (quarter ended December 31, 2008), and the lowest return for a quarter was
–1.07% (quarter ended June 30, 2008).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Mar. 30,
  1 Year 2007)
V anguard Short-Term Bond Index Fund Signal Shares 4.03% 5.22%
Comparative Indexes    
(reflect no deduction for fees or expenses)    
Spliced Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08% 5.19%
Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08
Barclays Capital U.S. 1-5 Year Gov/Credit Bond Index 4.08 5.18

 

8


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Manager

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has managed the Fund since 2005.

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

9


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Signal Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.08%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0. 11%

 

10


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                       $35 $62 $141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 46% .

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/ Credit Bond 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.

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:

11


 

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Signal 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 and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

12


 

 

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Signal Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 6.85% (quarter ended December 31, 2008), and the lowest return for a quarter was
–2.92% (quarter ended December 31, 2010 ).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Jun. 4,
  1 Year 2007)
Vanguard Intermediate-Term Bond Index Fund Signal Shares 9.49% 7.90%
Comparative Indexes    
(reflect no deduction for fees or expenses)    
S pliced Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44% 7.75%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 7.74

 

13


 

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2008.

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

14


 

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.

15


 

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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.

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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


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.

16


 

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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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.

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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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.

 

17


 

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


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.

 

Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (r edeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 each Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk should be moderate for the Total Bond Market Index Fund, and low for the other funds .


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.

18


 

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 nationally recognized statistical rating organizations (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.

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 restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

The following summary table is provided to help you distinguish among the Funds and their various risks.

Risks of the Funds          
      Call/   Index
    Interest Prepayment Credit Sampling
Fund Income Risk Rate 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 Index Moderate Moderate Low Low Low

 

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all bonds 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’s advisor generally 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

19


 

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.


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 the Fund’s target index. Index sampling risk for each Fund should be low.

The Funds are generally managed without regard to tax ramifications.

The following table shows the number of bonds held by each Fund, as well as the number of bonds in each Fund’s target i ndex, as of December 31, 2010 .

  Number of Number of Bonds in
Fund Bonds Held Target Index
Total Bond Market Index 4 ,741 8,216
Short-Term Bond Index 1,273 2,287
Intermediate-Term Bond Index 1,079 1,572

 

Types of bonds. The Total Bond Market Index Fund tracks the Barclays Capital U.S. Aggregate Float Adjusted Index; the Short- Term and Intermediate-Term Bond Index Funds track subsets of that Index. Barclays Capital U.S. Aggregate Float Adjusted Index measures the total universe of public, 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, 2010 , 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 4 3.0% 24.1% 27.7% 4.3% 0.9%           100%
Short-Term Bond Index 71.9 20.8 0.1 6.8 0.4 100
Intermediate-Term            
Bond Index 57.5 36.5 0.1 5.9 0.0 100

 

20


 

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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

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

21


 

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 bonds and the prices of U.S. bonds 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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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

22


 

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.


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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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.

23


 

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 ETF Shares of other Vanguard funds. 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

24


 

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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 has 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 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

25


 

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 119%, a s reported by Morningstar, Inc., on December 31, 2010 .

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.

 

The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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.

 

26


 

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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income G roup. See biography below.

The managers primarily responsible for the day-to-day management of the Funds are:

Joshua C. Barrickman , CFA, Principal of Vanguar d. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Intermediate-Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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

27


 

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.

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 managed the Total Bond Market Index Fund since 1992 (co-managed since 2008). E ducation: 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 shares of 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 monthly; capital gains distributions generally occur annually in December. In addition, the Funds may occasionally make a supplemental distribution 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.

Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

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Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or 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 2010 with a net asset value (price)
of $10.35 per share. During the year, each Signal Share earned $0.374 from
investment income (interest) and $0.297 from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $0.421 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $10.60, reflecting earnings of $0.671
per share and distributions of $0.421 per share. This was an increase of $0.25 per
share (from $10.35 at the beginning of the year to $10.60 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.54% for the year.
 
As of December 31, 2010 , the Signal Shares had approximately $8.8 billion in net
assets. For the year, the expense ratio was 0.11% ($1.10 per $1,000 of net
assets), and the net investment income amounted to 3.49% of average net
assets. The Fund sold and replaced securities valued at 75% of its net assets.

 

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Total Bond Market Index Fund Signal Shares          
          Sept. 1,
          2006 1 to
    Year Ended December 31,   Dec. 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.35 $10.18 $10.16 $9.99 $9.94
Investment Operations          
Net Investment Income .374 .432 .486 .510 .166
Net Realized and Unrealized Gain (Loss) on          
Investments .297 .170 .020 .170 .050
Total from Investment Operations .671 .602 .506 .680 .216
Distributions          
Dividends from Net Investment Income (.374) (.432) (.486) (.510) (.166)
Distributions from Realized Capital Gains (.047)
Total Distributions (.421) (.432) (.486) (.510) (.166)
Net Asset Value, End of Period $10.60 $10.35 $10.18 $10.16 $9.99
Total Return 6.54% 6.04% 5.15% 7.02% 2.18%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $8,813 $8,450 $7,372 $5,414 $632
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.11% 0.10% 0.11% 2
Ratio of Net Investment Income to Average Net          
Assets 3.49% 4.19% 4.82% 5.11% 4.97% 2
Turnover Rate 3 75% 4 80% 61% 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.          
4 Includes 28% that is attributable to mortgage-dollar-roll activity.        

 

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Short-Term Bond Index Fund Signal Shares        
        March 30,
        2007 1 to
  Year Ended December 31,   Dec. 31,
  2010 2009 2008 2007
Net Asset Value, Beginning of Period $10.42 $10.28 $10.13 $9.93
Investment Operations        
Net Investment Income .240 .303 .397 .352
Net Realized and Unrealized Gain (Loss) on Investments .177 .141 .150 .200
Total from Investment Operations .417 .444 .547 .552
Distributions        
Dividends from Net Investment Income (.240) (.303) (.397) (.352)
Distributions from Realized Capital Gains (.047) (.001)
Total Distributions (.287) (.304) (.397) (.352)
Net Asset Value, End of Period $10.55 $10.42 $10.28 $10.13
Total Return 4.03% 4.38% 5.51% 5.67%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $6,987 $5,080 $3,212 $1,851
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.11% 0.10% 2
Ratio of Net Investment Income to Average Net Assets 2.26% 2.88% 3.87% 4.66% 2
Turnover Rate 3 58% 77% 101% 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.        

 

32


 

Intermediate-Term Bond Index Fund Signal Shares        
        June 4,
        2007 1 to
  Year Ended December 31,   Dec. 31,
  2010 2009 2008 2007
Net Asset Value, Beginning of Period $10.72 $10.50 $10.50 $10.12
Investment Operations        
Net Investment Income .461 .485 .506 .297
Net Realized and Unrealized Gain (Loss) on Investments .547 .220 .380
Total from Investment Operations 1.008 .705 .506 .677
Distributions        
Dividends from Net Investment Income (.461) (.485) (.506) (.297)
Distributions from Realized Capital Gains (.057)
Total Distributions (.518) (.485) (.506) (.297)
Net Asset Value, End of Period $11.21 $10.72 $10.50 $10.50
Total Return 9.49% 6.89% 5.01% 6.77%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $2,255 $1,918 $1,720 $1,443
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.11% 0.10% 2
Ratio of Net Investment Income to Average Net Assets 4.08% 4.60% 4.89% 4.82% 2
Turnover Rate 3 46% 72% 89% 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.        

 

33


 

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 Participant Services, 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 its policies without 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

Transaction requests (e.g., a contribution, exchange, or redemption) must be in good order. Good order means that Vanguard has determined that (1) your transaction request includes complete information and (2) appropriate assets are already in your account or new assets have been received.

Processing times for your transaction requests may differ among recordkeepers or among transaction types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing timeframes for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

Your transaction will then be based on the next-determined NAV of the Fund‘s Signal Shares. If your transaction request was received in good order before the close of regular trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that day’s NAV and trade date. NAVs are calculated only on days the NYSE is open for trading.

If Vanguard is serving as your plan recordkeeper, and i f your transaction involves one or more investments with an early cut-off time for processing or an other trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

34


 

You generally begin earning dividends on the business day following your contribution trade date. You generally will continue earning dividends until the first business day following your exchange or redemption trade date.

Frequent Trading

The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of 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.

If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount . Please note that the 60-day clock restarts after every exchange out of the fund.

The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax, if otherwise permitted, are not mail requests and are subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased 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; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and 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 the Fund’s prospectus. Contact Vanguard Participant Services, 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 for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at

35


 

the intermediary (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, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor participants’ trading activity with respect to Vanguard funds.

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.

No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.

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 owner, or the account.

Uncashed Checks

Vanguard will not pay interest on uncashed checks.

Portfolio Holdings

We generally post on our website at v anguard.com , in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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


 

Additional Information        
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Total Bond Market Index Fund        
Signal Shares 9/1/2006 TotBdSgl 1351 921937868
  (Investor Shares      
1 2/11/1986)
Short-Term Bond Index Fund        
Signal Shares 3/30/2007 STBondSgl 1349 921937850
  (Investor Shares      
3/1/1994)

Intermediate-Term Bond Index Fund        
Signal Shares 6/4/2007 ITBondSgl 1350 921937843
  (Investor Shares      
3/1/1994)

 
Accessing Fund Information Online    

 

Vanguard Online at V anguard.com

V isit Vanguard’s education-oriented website for access to timely news and information about Vanguard funds and services and easy-to-use, interactive tools to help you create your own investment and retirement strategies.

CFA ® is a trademark owned by CFA Institute.

37


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

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.

38


 

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index.

An index that reflects the performance of the Barclays Capital U.S. 1–5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

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.

39


 

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Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information To receive a free copy of the latest annual or semiannual
If you would like more information about Vanguard report or the SAI, or to request additional information
Bond Index Funds, the following documents are about the Funds or other Vanguard funds, please visit
available free upon request: vanguard.com or contact us as follows:
 
Annual/Semiannual Reports to Shareholders The Vanguard Group
Additional information about the Funds’ investments is Participant Services
available in the Funds’ annual and semiannual reports P.O. Box 2900
to shareholders. In the annual report, you will find a Valley Forge, PA 19482-2900
discussion of the market conditions and investment Telephone: 800-523-1188
strategies that significantly affected the Funds’ Text telephone for people with hearing impairment:
performance during their last fiscal year. 800-749-7273
 
Statement of Additional Information (SAI) Information Provided by the Securities and
The SAI provides more detailed information about Exchange Commission (SEC)
the Funds. You can review and copy information about the Funds
  (including the SAI) at the SEC’s Public Reference Room
The SAI and the financial highlights information from  
  in Washington, DC. To find out more about this public
the current annual and semiannual reports a re  
  service, call the SEC at 202-551-8090. Reports and
incorporated by reference into (and are thus legally a  
  other information about the Funds are also available
part of) this prospectus.  
  in the EDGAR database on the SEC’s Internet site
  at 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 20549-1520.
 
  Funds’ Investment Company Act file number: 811-4681

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

I 1351 042011


 

Vanguard Bond Index Funds
Prospectus
 
April 26, 2011
 
Institutional Shares & Institutional Plus Shares
Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX)
Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)
Vanguard Intermediate-Term Bond Index Fund Institutional Shares (VBIMX)
Vanguard Long-Term Bond Index Fund Institutional Shares (VBLLX)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Vanguard Fund Summaries   Investing With Vanguard 39
Total Bond Market Index Fund 1 Purchasing Shares 39
Intermediate-Term Bond Index Fund 7 Converting Shares 42
Long-Term Bond Index Fund 12 Redeeming Shares 43
Investing in Index Funds 17 Exchanging Shares 46
More on the Funds 18 Frequent-Trading Policy 47
The Funds and Vanguard 29 Other Rules You Should Know 49
Investment Advisor 29 Fund and Account Updates 52
Dividends, Capital Gains, and Taxes 31 Contacting Vanguard 54
Share Price 33 Additional Information 55
Financial Highlights 34 Glossary of Investment Terms 56

 


 

Vanguard Total Bond Market Index Fund

Investment Objective

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

Fees and Expenses

The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
  Institutional Institutional Plus
  Shares 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 None
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
  Institutional Institutional Plus
  Shares Shares
Management Expenses 0.04% 0.03%
12b-1 Distribution Fee None None
Other Expenses 0.03% 0.02%
Total Annual Fund Operating Expenses 0.07% 0.05%

 

1


 

Examples

The following examples are intended to help you compare the cost of investing in the Fund’s Institutional Shares or Institutional Plus 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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

  1 Year 3 Years 5 Years 10 Years
Institutional Shares $7 $23 $40 $90
Institutional Plus Shares $5 $16 $28 $64

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 75%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted 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.

2


 

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

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. T he table shows how the average annual total returns of the share classes presented compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . The returns in the table for the Institutional Plus Shares are a blend of the performance of the Fund’s Institutional Shares prior to the inception date of the Institutional Plus Shares—February 5, 2010—and performance of the Institutional Plus Shares thereafter. Performance based on net asset value for the Institutional Plus Shares would be substantially similar because all share classes of the Fund constitute an investment in the same portfolio of securities; their returns should generally differ only to the extent that the expenses of the share classes differ. K eep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund Institutional Shares


 

During the periods shown in the bar chart, the highest return for a calendar quarter was 4.41% (quarter ended December 31, 2008), and the lowest return for a quarter was
–2.46% (quarter ended June 30, 2004).

4


 

Average Annual Total Returns for Periods Ended December 31, 2010    
  1 Year 5 Years 10 Years
Vanguard Total Bond Market Index Fund Institutional Shares      
Return Before Taxes 6.58% 5.86% 5.71%
Return After Taxes on Distributions 5.17 4.17 3.87
Return After Taxes on Distributions and Sale of Fund Shares 4.33 4.01 3.78
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 5.81% 5.84%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 5.80 5.84
  1 Year 5 Years 10 Years
Vanguard Total Bond Market Index Fund Institutional Plus Shares    
Return Before Taxes 6.60% 5.86% 5.71%
Comparative Indexes      
(reflect no deduction for fees, expenses, or taxes)      
S pliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 5.81% 5.84%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 5.80 5.84

 

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 individual 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 Institutional Shares and may differ for each share class. A fter-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.

5


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has managed the Fund since 1992 (co-managed since 2008).

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Institutional Shares Institutional Plus Shares
To open and maintain an account $5 million $100 million
To add to an existing account $100 (other than by Automatic $100 (other than by Automatic
  Investment Plan, which has no Investment Plan, which has no
  established minimum ) established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

6


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.04%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0.07%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$7 $23 $40 $90

 

7


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 46%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/ Credit Bond 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.

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 of investment-grade quality.

8


 

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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 6.87% (quarter ended December 31, 2008), and the lowest return for a quarter was –2.91% (quarter ended December 31, 2010 ).

9


 

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Jan. 26,
  1 Year 2006)
Vanguard Intermediate-Term Bond Index Fund Institutional Shares    
Return Before Taxes 9.53% 6.81%
Return After Taxes on Distributions 7.88 5.03
Return After Taxes on Distributions and Sale of Fund Shares 6.28 4.78
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
S pliced Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44% 6.62%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 6.61

 

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 individual 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 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.

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2008.

10


 

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Institutional Shares
To open and maintain an account $ 25 million
To add to an existing account $100 ( other than by Automatic Investment Plan,
  which has no established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

11


 

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.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.04%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0.07%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$7 $23 $40 $90

 

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Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54% .

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted 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 .

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 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 Fund’s target index. Index sampling risk for the Fund should be low.

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An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Long-Term Bond Index Fund Institutional Shares


 

During the periods shown in the bar chart, the highest return for a calendar quarter was 13.07% (quarter ended December 31, 2008), and the lowest return for a quarter was
–6.13% (quarter ended March 31, 2009).

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Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Feb. 2,
  1 Year 2006)
Vanguard Long-Term Bond Index Fund Institutional Shares    
Return Before Taxes 10.44% 6.41%
Return After Taxes on Distributions 8.34 4.39
Return After Taxes on Distributions and Sale of Fund Shares 6.91 4.29
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. Long Gov/Credit Float Adjusted Index 10.16% 6.24%
Barclays Capital U.S. Long Gov/Credit Float Adjusted Index 10.16
B arclays Capital U.S. Long Gov/Credit Bond Index 10.16 6.23

 

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 individual 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 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.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Gerald Hwang, CFA, Portfolio Manager. He has co-managed the Fund since 2010.

15


 

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums Institutional Shares
To open and maintain an account $ 25 million
To add to an existing account $100 ( other than by Automatic Investment Plan,
  which has no established minimum)

 

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 and Institutional Plus Shares (Institutional Shares only for the Intermediate-Term and Long-Term Bond Index Funds). Institutional Shares are generally for investors wh o i nvest a minimum of $5 million (for the Total Bond Market Index Fund) and $ 25 million (for the Intermediate-Term and Long-Term Bond Index Funds). Institutional Plus Shares, if available, are generally for investors who invest a minimum of $100 million. A separate prospectus offers the Funds’ Investor Shares, which have an investment minimum of $3,000, as well as Admiral™ Shares for the Total Bond Market Index and Intermediate-Term Bond Index Funds, which have an investment minimum of $10,000 . Another prospectus offers the Total Bond Market Index and Intermediate-Term Bond Index Funds’ Signal ® Shares, which are generally for institutional and financial intermediary investors . In addition, each Fund issues an exchange-traded class of shares (ETF Shares), which are also offered through a separate prospectus.

All share classes offered by the Fund have a same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

18


 

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


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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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.

19


 

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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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 .


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.


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (r edeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 each Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk should be moderate for the Total Bond Market Index Fund, and low for the other funds .


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 nationally recognized statistical rating organizations (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.

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 restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

21


 

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 bonds 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’s advisor generally 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 relative to its target index. Because the Funds do not hold all the securities in their target indexes, some of the securities (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.


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 the Fund’s target index. Index sampling risk for each Fund should be low.

The Funds are generally managed without regard to tax ramifications

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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, 2010 .

  Number of Number of Bonds
Fund Bonds Held in Target Inde x
Total Bond Market Index 4,741 8,216
Intermediate-Term Bond Index 1,079 1,572
Long-Term Bond Index 1,114 1,430

 

Types of bonds. The Total Bond Market Index Fund tracks the Barclays Capital U.S. Aggregate Float Adjusted Index; the Intermediate -Term and Long-Term Bond Index Funds track subsets of that Index. Barclays Capital U.S. Aggregate Float Adjusted Index measures the total universe of public, 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, 2010 , 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 4 3.0% 24.1% 27.7% 4.3% 0.9% 100%
 
Intermediate-Term            
Bond Index 57.5 36.5 0.1 5.9 0.0 100
 
Long-Term Bond Index 44.6 43.6 0.0 11.5 0.3 100

 

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.

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

23


 

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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

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 bonds and the prices of U.S. bonds 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.

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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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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.

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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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

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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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent

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trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance .

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 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 119%, a s reported by Morningstar, Inc., on December 31, 2010 .

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.

 

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The Funds and Vanguard

Each Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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.

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Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below.

The managers primarily responsible for the day-to-day management of the Funds are:

Joshua C. Barrickman , CFA, Principal of Vanguar d. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has m anaged the Intermediate-Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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 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.

Gerald Hwang, CFA, Portfolio Manager. He has worked in investment management since 1993; has managed investment portfolios for Vanguard since 2008; and has co-managed the Long-Term Bond Index Fund since 2010. Education: B.A., Yale University; M.B.A., The Wharton School of the 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 managed the Total Bond Market Index Fund since 1992 (co-managed since 2008). Education: B.S., University of Illinois; M.B.A., University of Chicago.

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The Statement of Additional Information provides information about each portfolio manager’s compensation, other accounts under management, and ownership of shares of 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 monthly; capital gains distributions generally occur annually in December. In addition, the Funds may occasionally make a supplemental distribution 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 capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income.

• Any distributions of net long-term capital gains are taxable to you as long-term capital gains, 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.

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• 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 tax return.

• 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.

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.

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.

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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

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Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or mail.

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 2010 with a net asset value
(price) of $10.35 per share. During the year, each Institutional Share earned $0.378
from investment income (interest) and $0.297 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $0.425 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $10.60, reflecting earnings of $0.675
per share and distributions of $0.425 per share. This was an increase of $0.25 per
share (from $10.35 at the beginning of the year to $10.60 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.58% for the year.
 
As of December 31, 2010 , the Institutional Shares had approximately $20.4 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 3.53% of average net
assets. The Fund sold and replaced securities valued at 75% of its net assets.

 

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Total Bond Market Index Fund Institutional Shares        
      Year Ended December 31,
  2 010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.35 $10.18 $10.16 $9.99 $10.06
Investment Operations          
Net Investment Income .378 .437 .490 .513 .498
Net Realized and Unrealized Gain (Loss)          
on Investments .297 .170 .020 .170 (.070)
Total from Investment Operations .675 .607 .510 .683 .428
Distributions          
Dividends from Net Investment Income (.378) (.437) (.490) (.513) (.498)
Distributions from Realized Capital Gains (.047)
Total Distributions (.425) (.437) (.490) (.513) (.498)
Net Asset Value, End of Period $10.60 $10.35 $10.18 $10.16 $9.99
Total Return 6.58% 6.09% 5.19% 7.05% 4.40%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $20,419 $15,692 $12,431 $9,492 $8,257
Ratio of Total Expenses to          
Average Net Assets 0.07% 0.07% 0.07% 0.07% 0.07%
Ratio of Net Investment Income to          
Average Net Assets 3.53% 4.24% 4.86% 5.14% 5.01%
Turnover Rate 1 75% 2 80% 61% 54% 63%
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.          
2 Includes 28% that is attributable to mortgage-dollar-roll activity.        

 

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Total Bond Market Index Fund Institutional Plus Shares  
 
  F ebruary 5, 2010 1 to
  December 31, 2010
Net Asset Value, Beginning of Period $10.50
Investment Operations  
Net Investment Income .343
Net Realized and Unrealized Gain (Loss)  
on Investments .147
Total from Investment Operations .490
Distributions  
Dividends from Net Investment Income (.343)
Distributions from Realized Capital Gains (.047)
Total Distributions (.390)
Net Asset Value, End of Period $10.60
Total Return 4.68%
Ratios/Supplemental Data  
Net Assets, End of Period (Millions) $6,358
Ratio of Total Expenses to  
Average Net Assets 0.05% 2
Ratio of Net Investment Income to  
Average Net Assets 3.55% 2
Turnover Rate 3 75% 4
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.  
4 Includes 28% that is attributable to mortgage-dollar-roll activity.  

 

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Intermediate-Term Bond Index Fund Institutional Shares      
          Jan. 26,
          2006 1 to
    Year Ended December 31,  
          Dec. 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $10.72 $10.50 $10.50 $10.25 $10.29
Investment Operations          
Net Investment Income .465 .490 .510 .518 .473
Net Realized and Unrealized Gain (Loss) on          
Investments .547 .220 .250 (.040)
Total from Investment Operations 1.012 .710 .510 .768 .433
Distributions          
Dividends from Net Investment Income (.465) (.490) (.510) (.518) (.473)
Distributions from Realized Capital Gains (.057)
Total Distributions (.522) (.490) (.510) (.518) (.473)
Net Asset Value, End of Period $11.21 $10.72 $10.50 $10.50 $10.25
Total Return 9.53% 6.95% 5.05% 7.73% 4.36%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $582 $522 $508 $271 $181
Ratio of Total Expenses to Average          
Net Assets 0.07% 0.07% 0.07% 0.07% 0.08% 2
Ratio of Net Investment Income to Average          
Net Assets 4.12% 4.65% 4.93% 4.85% 5.01% 2
Turnover Rate 3 46% 72% 89% 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.          

 

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Long-Term Bond Index Fund Institutional Shares        
          Feb. 2,
          2006 1 to
    Year Ended December 31,  
          Dec. 31,
  2010 2009 2008 2007 2006
Net Asset Value, Beginning of Period $11.56 $11.98 $11.65 $11.53 $11.66
Investment Operations          
Net Investment Income .613 .625 .632 .626 .559
Net Realized and Unrealized Gain (Loss)          
on Investments .583 (.420) .330 .120 (.130)
Total from Investment Operations 1.196 .205 .962 .746 .429
Distributions          
Dividends from Net Investment Income (.613) (.625) (.632) (.626 ) (.559)
Distributions from Realized Capital Gains (.103)
Total Distributions (.716) (.625) (.632) (.626 ) (.559)
Net Asset Value, End of Period $12.04 $11.56 $11.98 $11.65 $11.53
Total Return 10.44% 1.91% 8.77% 6.71% 3.86%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $1,229 $509 $388 $415 $309
Ratio of Total Expenses to Average          
Net Assets 0.07% 0.07% 0.07% 0.07% 0.08% 2
Ratio of Net Investment Income to Average          
Net Assets 5.02% 5.48% 5.61% 5.45% 5.40% 2
Turnover Rate 3 54% 69% 67% 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.          

 

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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 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. Note that each reference to “you” in this prospectus applies to any one or more registered account owners.

Purchasing Shares

Vanguard reserves the right, without 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 and Institutional Plus Shares To open and maintain an account. For the Total Bond Market Index Fund$5 million for Institutional Shares, $100 million for Institutional Plus Shares; for the Intermediate-Term and Long-Term Bond Index Funds—$25 million for Institutional Shares.

Certain Vanguard institutional clients may meet the minimum investment amount by aggregating up to three separate accounts within the same Fund. This aggregation policy does not apply to clients receiving special administrative services from Vanguard or to omnibus accounts maintained by financial intermediaries.

Institutional clients whose accounts are recordkept by Vanguard generally may hold Institutional Shares if the client has $10 million or more in the Total Bond Market Index Fund. Vanguard may charge certain additional recordkeeping fees. Please contact your Vanguard representative to determine whether additional recordkeeping fees apply to your account.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Policy, and Other Rules You Should Know before placing your purchase request.

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Online. You may open certain types of accounts, request a purchase of shares, and request an exchange (the purchase of shares of one Vanguard fund using the proceeds of a simultaneous redemption of shares of another Vanguard fund) through our website at van guard.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 call Vanguard to request a purchase of shares in your account . See Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard 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 from a bank account. To establish the electronic bank transfer option on an account, you must designate the 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 from time to time. Your purchase request can be initiated online (if you are a registered user of v anguard.com ), 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

Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an

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exchange online (if you are a registered user of v anguard.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 that 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 generally 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 vanguard.com or see Contacting Vanguard .

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Earning Dividends

You generally 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 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 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 at the time of the conversion. 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.

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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 NAVs of the different share classes on the trade date. NAVs are calculated only on days that 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 Institutional Shares to Institutional Plus Shares

You may convert Institutional Shares to Institutional Plus Shares of the Fund (if available) , provided that your account balance is at least $100 million.

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 Policy , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares and request an exchange (using the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at van guard.com if you are a registered user.

By telephone. You may call Vanguard to request a redemption of shares. 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 .

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

43


 

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 redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request 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. To establish t he wire redemption option , you generally must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form.

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 v anguard.com ), by telephone, or by mail.

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, 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 generally 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 generally 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

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(generally 4 p.m., Eastern time), the redemption proceeds generally 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 generally 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 of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally 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 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. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the Fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

Earning Dividends

You generally will continue earning dividends until the first business day following 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.

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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 Policy 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 up to a 15-day restriction on your ability to request check redemptions online and by telephone. You can request a redemption in writing at any time. Confirmations of address changes are sent to both the old and new addresses.

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 .

Payment to a different person or address. At your request, we can make your redemption check payable to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require a signature guarantee or a notarized signature . You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange .

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

46


 

make exchange requests online (if you are a registered user of v anguard.com ), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Please note that Vanguard reserves the right, without 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 Policy

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in th e f unds. Each Vanguard fund (other than money market funds and short-term bond funds) 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. ETF Shares are not subject to these frequent-trading limits. The brokerage firm through which you hold your ETF Shares, however, may place certain limits on your ability to purchase and/or sell ETF Shares over any given period .

For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.

The frequent-trading 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 ® .

• 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. (Transaction requests submitted by fax, if otherwise permitted, are not mail transactions and are subject to the policy.)

• Transfers and reregistrations 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.

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• 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,* 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.

• Reregistrations 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, if otherwise permitted, are not mail requests and are subject to the policy.)

* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

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 revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (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

48


 

intermediary, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on client 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 summary prospectus (or prospectus) and/or shareholder 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 v anguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions online . You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and shareholder reports electronically. If you are a registered user of v anguard.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 online, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

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 ® . 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.

49


 

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 owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

Includet he fund name and account number.

Includet he amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must include :

• Signature guarantees or notarized signatures , if required for the type of transaction.

(Call Vanguard for specifi c r equirements.)

• Any supporting documentation that may be required.

The requirements vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without 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 generally will accept telephone or online instructions from any one owner or authorized person.

50


 

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 or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law.

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 Policy Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Low-Balance Accounts

Each Fund reserves the right to convert an investor’s Institutional or Institutional Plus Shares to another share class, as appropriate, if the investor’s fund account balance falls below the minimum initial investment for any reason, including market fluctuation. Any such conversion or redemption will be preceded by written notice to the investor.

51


 

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if 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 if Vanguard reasonably believe s 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 purchase fee , redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believe s they are deemed to be in the best interest of a fund.

Share Classes

Vanguard reserves the right, without 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

52


 

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 quarter . 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 Information Statements

For most accounts, we are required to provide annual tax Forms to assist you in preparing your income tax returns. These Forms , which are generally mailed in January, will report the previous year’s dividends, capital gains distributions, proceeds from the sale of shares from taxable accounts, and distributions from IRAs and other retirement plans. Registered users of v anguard.com can also view these Forms online.

Average-Cost Review Statements

For most taxable accounts, an average-cost review statement will accompany the annual Form 1099-B. This statement shows the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, one of the methods established by the IRS and the only method used by Vanguard. You may want to consult a tax professional to determine if a different method is best for you.

Annual and Semiannual Reports

We will send (or provide online, whichever you prefer) r eports about Vanguard Bond Index Funds twice a year, in February and August. These 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 van guard.com, in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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 Fun d. Pl ease 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.

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Contacting Vanguard

Web

Vanguard.com

24 hours a day, 7 days a week

For the most complete source of Vanguard news

For fund, account, and service information For most account transactions For literature requests

 

Phone

Vanguard Tele-Account ® 800-662-6273 (ON-BOARD)

For automated fund and account information 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

impairment at 800-749-7273)

For literature requests

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) (Text telephone for people with hearing

impairment at 800-749-7273)

For account information For most account 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 888-809-8102

For information and services for large institutional investors Business hours only: Monday–Friday, 8:30 a.m. to 9 p.m., Eastern time

Intermediary Sales Support 800-997-2798

For information and services for financial intermediaries 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

 

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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

 

Additional Information        
 
 
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Total Bond Market Index Fund        
Institutional Shares 9/18/1995 TotBdInst 222 921937504
(Investor Shares
  12/11/1986)      
Institutional Plus Shares 2/5/2010 TotBdInstPl 850 921937785
(Investor Shares
  12/11/1986)      
Intermediate-Term Bond Index Fund        
Institutional Shares 1/26/2006 ITBondInstl 504 921937884
(Investor Shares
  3/1/1994)      
Long-Term Bond Index Fund        
Institutional Shares 2/2/2006 LTBondInstl 545 921937876
(Investor Shares
  3/1/1994)      

 

CFA ® is a trademark owned by CFA Institute.

55


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

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.

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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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Long Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Long Government/ Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted Index thereafter.

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.


 

Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information If you are a client of Vanguard’s Institutional Division:
If you would like more information about Vanguard The Vanguard Group
Bond Index Funds, the following documents are Institutional Investor Information Department
available free upon request: P.O. Box 2900
  Valley Forge, PA 19482-2900
Annual/Semiannual Reports to Shareholders  
  Telephone: 888-809-8102; Text telephone for people
Additional information about the Funds’ investments is  
  with hearing impairment: 800-749-7273
available in the Funds’ annual and semiannual reports  
to shareholders. In the annual report, you will find a If you are a current Vanguard shareholder and would
discussion of the market conditions and investment like information about your account, account
strategies that significantly affected the Funds’ transactions, and/or account statements, please call:
performance during their last fiscal year.  
  Client Services Department
Statement of Additional Information (SAI) Telephone: 800-662-2739 (CREW); Text telephone for
The SAI provides more detailed information about the Funds. people with hearing impairment: 800-749-7273
 
The SAI and the financial highlights information from Information Provided by the Securities and
the current annual and semiannual reports a re Exchange Commission (SEC)
incorporated by reference into (and are thus legally a You can review and copy information about the Fund s
part of) this prospectus. (including the SAI) at the SEC’s Public Reference Room
  in Washington, DC. To find out more about this public
To receive a free copy of the latest annual or semiannual  
  service, call the SEC at 202-551-8090. Reports and
report or the SAI, or to request additional information  
  other information about the Funds are also available in
about the Funds or other Vanguard funds, please visit  
  the EDGAR database on the SEC’s Internet site at
v anguard.com or contact us as follows:  
  sec.gov, or you can receive copies of this information,
If you are an individual investor: for a fee, by electronic request at the following e-mail
The Vanguard Group address: publicinfo@sec.gov, or by writing the Public
Investor Information Department Reference Section, Securities and Exchange
P.O. Box 2900 Commission, Washington, DC 20549-1520.
Valley Forge, PA 19482-2900  
  Funds’ Investment Company Act file number: 811-4681
Telephone: 800-662-7447 (SHIP); Text telephone for  
people with hearing impairment: 800-749-7273  

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

I 0504 042011


 

Vanguard Bond ETFs ®
Prospectus
 
April 26, 2011
 
Exchange-traded fund shares that are not individually redeemable and are
listed on NYSE Arca
Vanguard Total Bond Market Index Fund ETF Shares (BND)
Vanguard Short-Term Bond Index Fund ETF Shares (BSV)
Vanguard Intermediate-Term Bond Index Fund ETF Shares (BIV)
Vanguard Long-Term Bond Index Fund ETF Shares (BLV)
 
 
 
 
This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Vanguard ETF Summaries   More on the Fund and ETF Shares 24
Total Bond Market ETF 1 The Funds and Vanguard 36
Short-Term Bond ETF 7 Investment Advisor 37
Intermediate-Term Bond ETF 12 Dividends, Capital Gains, and Taxes 38
Long-Term Bond ETF 17 Share Price and Market Price 40
Investing in Vanguard ETF Shares 22 Additional Information 41
    Financial Highlights 42
    Glossary of Investment Terms 47

 


 

Vanguard Total Bond Market ETF

Investment Objective

Vanguard Total Bond Market Index Fund seeks to track the performance of a broad, market-weighted bond index.

Fees and Expenses

The following tabl e describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Transaction Fee on Purchases and Sales None through Vanguard  
  (Broker fees vary)  
Transaction Fee on Reinvested Dividends None through Vanguard  
  (Broker fees vary)  
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
 
Management Expenses   0.08%
12b-1 Distribution Fee   None
Other Expenses   0.03%
Total Annual Fund Operating Expenses   0.1 1 %

 

Example

The following example is intended to help you compare the cost of investing in Total Bond Market ETF with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you 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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                   $35 $62 $141

 

1


 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 75%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted 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.

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

2


 

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target 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 NYSE Arca 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 (NAV), there may be times when the market price and the NAV vary significantly. Thus, you may pay more or less than NAV when you buy Total Bond Market ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although Total Bond Market ETF Shares are listed for trading on NYSE Arca, it is possible that an active trading market may no t b e maintained.

• Trading of Total Bond Market ETF Shares on NYSE Arca may be halted by the activation of individual or marketwide “circuit breakers” (which halt trading for a specified period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of Total Bond Market ETF may also be halted if (1) the shares are delisted from NYSE Arca without first being listed on another exchange or (2) exchange officials deem such action is appropriate in the interest of a fair and orderly market or to protect investors.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

3


 

Annual Total Returns

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 ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of a relevant market index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Total Bond Market Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 4.39% (quarter ended December 31, 2008), and the lowest return for a quarter was –1.33% (quarter ended December 31, 2010 ).

4


 

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Apr. 3,
  1 Year 2007)
V anguard Total Bond Market Index Fund ETF Shares    
Based on NAV    
Return Before Taxes 6.51% 6.20%
Return After Taxes on Distributions 5.12 4.66
Return After Taxes on Distributions and Sale of Fund Shares 4.28 4.40
Based on Market Price    
Return Before Taxes 6.25 6.19
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 6.19%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 6.18

 

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 individual 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 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.

5


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has managed the Fund since 1992 (co-managed since 2008).

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares.

ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, and only in exchange for baskets of securities rather than cash. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. A sale of ETF Shares is a taxable event, which 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 gain distributions that you receive, as well as your gains or losses from any sale of ETF Shares, may also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

6


 

Vanguard Short-Term Bond ETF

Investment Objective

Vanguard Short-Term Bond Index Fund seeks to track the performance of a market-weighted bond index with a short-term dollar-weighted average maturity.

Fees and Expenses

The following tabl e describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Transaction Fee on Purchases and Sales None through Vanguard  
  (Broker fees vary)  
Transaction Fee on Reinvested Dividends None through Vanguard  
  (Broker fees vary)  
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
 
Management Expenses   0.08%
12b-1 Distribution Fee   None
Other Expenses   0.03%
Total Annual Fund Operating Expenses   0 .11%

 

Example

The following example is intended to help you compare the cost of investing in Short-Term Bond ETF with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you 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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                     $35 $62 $141

 

7


 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 58%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 1–5 Year Government/ Credit Float Adjusted 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.

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 of investment-grade quality.

8


 

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 Fund’s target 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 NYSE Arca 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 (NAV), there may be times when the market price and the NAV vary significantly. Thus, you may pay more or less than NAV when you buy Short-Term Bond ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although Short-Term Bond ETF Shares are listed for trading on NYSE Arca, it is possible that an active trading market may not b e maintained.

• Trading of Short-Term Bond ETF Shares on NYSE Arca may be halted by the activation of individual or marketwide “circuit breakers” (which halt trading for a specified period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of Short-Term Bond ETF may also be halted if (1) the shares are delisted from NYSE Arca without first being listed on another exchange or (2) exchange officials deem such action is appropriate in the interest of a fair and orderly market or to protect investors .

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of a relevant market index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

9


 

Annual Total Returns — Vanguard Short-Term Bond Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 3.72% (quarter ended December 31, 2008), and the lowest return for a quarter was –1.06% (quarter ended June 30, 2008).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Apr. 3,
  1 Year 2007)
V anguard Short-Term Bond Index Fund ETF Shares    
Based on NAV    
Return Before Taxes 4.00% 5.24%
Return After Taxes on Distributions 3.09 4.06
Return After Taxes on Distributions and Sale of Fund Shares 2.65 3.80
Based on Market Price    
Return Before Taxes 3.91 5.26
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08% 5.21%
Barclays Capital U.S. 1-5 Year Gov/Credit Float Adjusted Index 4.08
Barclays Capital U.S. 1-5 Year Gov/Credit Bond Index 4.08 5.21

 

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 individual 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

10


 

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.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Manager

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has managed the Fund since 2005.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares.

ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, and only in exchange for baskets of securities rather than cash. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. A sale of ETF Shares is a taxable event, which 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 gain distributions that you receive, as well as your gains or losses from any sale of ETF Shares, may also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

11


 

Vanguard Intermediate-Term Bond ETF

Investment Objective

Vanguard Intermediate-Term Bond Fund seeks to track the performance of a market-weighted bond index with an intermediate-term dollar-weighted average maturity.

Fees and Expenses

The following tabl e describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees    
(Fees paid directly from your investment)    
 
Transaction Fee on Purchases and Sales None through Vanguard  
  (Broker fees vary)  
Transaction Fee on Reinvested Dividends None through Vanguard  
  (Broker fees vary)  
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
 
Management Expenses   0.08%
12b-1 Distribution Fee   None
Other Expenses   0.03%
Total Annual Fund Operating Expenses   0 .11%

 

Example

The following example is intended to help you compare the cost of investing in Intermediate-Term Bond ETF with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you 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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                        $35 $62 $141

 

12


 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 46% .

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. 5–10 Year Government/ Credit Bond 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.

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 of investment-grade quality.

13


 

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 Fund’s target 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 NYSE Arca 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 (NAV), there may be times when the market price and the NAV vary significantly. Thus, you may pay more or less than NAV when you buy Intermediate-Term Bond ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although Intermediate-Term Bond ETF Shares are listed for trading on NYSE Arca, it is possible that an active trading market may no t be maintained.

• Trading of Intermediate-Term Bond ETF Shares on NYSE Arca may be halted by the activation of individual or marketwide “circuit breakers” (which halt trading for a specified period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of Intermediate-Term Bond ETF may also be halted if (1) the shares are delisted from NYSE Arca without first being listed on another exchange or (2) exchange officials deem such action is appropriate in the interest of a fair and orderly market or to protect investors .

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of a relevant market index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

14


 


 

Annual Total Returns — Vanguard Intermediate-Term Bond Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 6.94% (quarter ended December 31, 2008), and the lowest return for a quarter was –2.87% (quarter ended December 31, 2010 ).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Apr. 3,
  1 Year 2007)
V anguard Intermediate-Term Bond Index Fund ETF Shares    
Based on NAV    
Return Before Taxes 9.55% 7.35%
Return After Taxes on Distributions 7.94 5.70
Return After Taxes on Distributions and Sale of Fund Shares 6.30 5.33
Based on Market Price    
Return Before Taxes 9.13 7.31
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44% 7.18%
Barclays Capital U.S. 5-10 Year Gov/Credit Float Adjusted Index 9.44
Barclays Capital U.S. 5-10 Year Gov/Credit Bond Index 9.42 7.18

 

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 individual 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

15


 

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.

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2008.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares.

ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, and only in exchange for baskets of securities rather than cash. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. A sale of ETF Shares is a taxable event, which 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 gain distributions that you receive, as well as your gains or losses from any sale of ETF Shares, may also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

16


 

Vanguard Long-Term Bond ETF

Investment Objective

Vanguard Long-Term Bond Index Fund seeks to track the performance of a market-weighted bond index with a long-term dollar-weighted average maturity.

Fees and Expenses

The following tabl e describes the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

 

Shareholder Fees    
(Fees paid directly from your investment)    
 
Transaction Fee on Purchases and Sales None through Vanguard  
  (Broker fees vary)  
Transaction Fee on Reinvested Dividends None through Vanguard  
  (Broker fees vary)  
 
 
Annual Fund Operating Expenses    
(Expenses that you pay each year as a percentage of the value of your investment)  
 
Management Expenses   0.07%
12b-1 Distribution Fee   None
Other Expenses   0.04%
Total Annual Fund Operating Expenses   0 .11%

 

Example

The following example is intended to help you compare the cost of investing in Long-Term Bond ETF with the cost of investing in other funds. It illustrates the hypothetical expenses that you would incur over various periods if you 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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11                        $35 $62 $141

 

17


 

This example does not include the brokerage commissions that you may pay to buy and sell ETF Shares of the Fund.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54 %.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted 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.

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 of investment-grade quality.

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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 Fund’s target 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 NYSE Arca 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 (NAV), there may be times when the market price and the NAV vary significantly. Thus, you may pay more or less than NAV when you buy Long-Term Bond ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares.

• Although Long-Term Bond ETF Shares are listed for trading on NYSE Arca, it is possible that an active trading market may not b e maintained.

• Trading of Long-Term Bond ETF Shares on NYSE Arca may be halted by the activation of individual or marketwide “circuit breakers” (which halt trading for a specified period of time when the price of a particular security or overall market prices decline by a specified percentage). Trading of Long-Term Bond ETF may also be halted if (1) the shares are delisted from NYSE Arca without first being listed on another exchange or (2) exchange officials deem such action is appropriate in the interest of a fair and orderly market or to protect investors .

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 ETF Shares (based on NAV) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of a relevant market index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

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Annual Total Returns — Vanguard Long-Term Bond Index Fund ETF Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 13.09% (quarter ended December 31, 2008), and the lowest return for a quarter was
–6.21% (quarter ended March 31, 2009).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Apr. 3,
  1 Year 2007)
V anguard Long-Term Bond Index Fund ETF Shares    
Based on NAV    
Return Before Taxes 10.36% 7.07%
Return After Taxes on Distributions 8.30 5.11
Return After Taxes on Distributions and Sale of Fund Shares 6.85 4.90
Based on Market Price    
Return Before Taxes 10.52 7.15
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. Long Gov/Credit Float Adjusted Index 10.16% 6.94%
Barclays Capital U.S. Long Gov/Credit Float Adjusted Index 10.16
Barclays Capital U.S. Long Gov/Credit Bond Index 10.16 6.94

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 individual 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

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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.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

Gregory Davis, CFA, Principal of Vanguard and head of Vanguard’s Bond Index Group. He has co-managed the Fund since 2008.

Gerald Hwang, CFA, Portfolio Manager. He has co-managed the Fund since 2010.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares.

ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, and only in exchange for baskets of securities rather than cash. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. A sale of ETF Shares is a taxable event, which 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 gain distributions that you receive, as well as your gains or losses from any sale of ETF Shares, may also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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Investing in Vanguard ETF ® 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 Index Fund Vanguard Total Bond The overall taxable U.S.
  Market ETF bond market
Vanguard Short-Term Bond Index Fund Vanguard Short-Term Short-term U.S. bonds
  Bond ETF  
Vanguard Intermediate-Term Bond Index Fund Vanguard Intermediate- Intermediate-term U.S.
  Term Bond ETF bonds
Vanguard Long-Term Bond Index Fund Vanguard Long-Term Long-term U.S. bonds
  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 the net asset value (NAV), typically calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund by an individual investor.

An organized secondary 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 typically 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.

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How Do I Buy and Sell Vanguard ETF Shares?

Individual investors can purchase ETF Shares on the secondary market through a broker. When you buy or sell ETF Shares, your broker may 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 or less than NAV when you buy ETF Shares, and receive more or less than NAV when you sell those shares.

Your ownership of ETF Shares will be shown on the records of the 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.

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More on the Fund and ETF Shares

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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’ ETF Shares, an exchange-traded class of shares. 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 Index, Short-Term Bond Index, and Intermediate-Term Bond Index Funds, which have a minimum of $10,000. Another prospectus offers Signal ® Shares for the Total Bond Market Index, Short-Term Bond Index, and Intermediate-Term Bond Index Funds, which are generally for institutional and financial intermediary investors. In addition, the Total Bond Market Index, Intermediate-Term Bond Index, and Long-Term Bond Index Funds offer Institutional Shares, which are generally for investors who invest a minimum of $5 million (for the Total Bond Market Index) or $25 million (for the Intermediate-Term and Long-Term Bond Index Funds). The Total Bond Market Index Fund also offers Institutional Plus Shares, which have an investment minimum of $100 million.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

A Note to 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.

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Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. 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 securities that are held in its target index may be changed only upon 60 days’ notice to shareholders.

Market Exposure


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.

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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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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.

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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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 .


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.

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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.

 

Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


Each Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (r edeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 each Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk should be moderate for the Total Bond Market Index Fund, and low for the other funds .


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.

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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 nationally recognized statistical rating organizations (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.

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 restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

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
Short-Term Bond Index High Low Low 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 bonds 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’s advisor generally 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,

28


 

quality, and callability of the underlying bonds. In addition, each Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Funds do not hold all the securities in their target indexes, some of the securities (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.


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 the Fund’s target index. Index sampling risk for each Fund should be low.

The Funds are generally managed without regard to tax ramifications.

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, 2010 .

  Number of Number of Bonds
Fund Bonds Held in Target Inde x
Total Bond Market Index 4,741 8,216
Short-Term Bond Index 1,273 2,287
Intermediate-Term Bond Index 1,079 1,572
Long-Term Bond Index 1,114 1,430

 

Types of bonds. The Total Bond Market ETF tracks the Barclays Capital U.S. Aggregate Float Adjusted Index; the Short- Term , Intermediate-T erm , and Long-Term Bond ETFs track subsets of that Index. Barclays Capital U.S. Aggregate Float Adjusted Index measures the total universe of public, 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, 2010 , 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 4 3.0% 24.1% 27.7% 4.3% 0.9%          100%
Short-Term Bond Index 71.9 20.8 0.1 6.8 0.4 100
Intermediate-Term            
Bond Index 57.5 36.5 0.1 5.9 0.0 100
Long-Term Bond Index 44.6 43.6 0.0 11.5 0.3 100

 

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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 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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

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

30


 

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 bonds and the prices of U.S. bonds 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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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

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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.


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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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.

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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

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


ETF Shares are not individually redeemable. They can be redeemed with the issuing Fund at NAV only in large blocks known as Creation Units, which would cost millions of dollars to assemble.

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The market price of ETF Shares may differ from NAV. 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 or less than NAV when you buy ETF Shares on the secondary market, and you may receive more or 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.

Vanguard’s website at vanguard.com shows the previous day’s closing NAV and closing market price for each Fund’s ETF Shares. The website also discloses, in the Premium/ Discount Analysis section of the ETF Shares’ Performance page, 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.


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.


Trading may be halted . Trading of Vanguard ETF Shares on an exchange may be halte d b y the activation of individual or marketwide “circuit breakers” ( which halt trading for a specific period of time when the price of a particular security or overall market prices decline by a specified percentag e). Trading of ETF Shares may also 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 .

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 . T he broker may 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.

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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 funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions.

Frequent Trading or 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 by the fund , 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, 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 to the issuing fund (as previously noted) that may result from frequent cash trades. 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. The broker through which you hold your ETF Shares, however, may place certain limits on your ability to purchase and/or sell ETF Shares over any given period.

Portfolio Holdings

We generally post on our website at vanguard.com , in the Portfolio section of each Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

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

35


 

longer-term bond funds. The average turnover rate for bond funds was approximately 119%, a s reported by Morningstar, Inc., on December 31, 2010 .

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 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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.

 

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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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Grou p. See biography below.

The managers primarily responsible for the day-to-day management of the Funds are:

Joshua C. Barrickman , CFA, Principal of Vanguar d. He has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Intermediate-Term Bond Index Fund since 2008. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

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

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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.

Gerald Hwang , CFA, Portfolio Manager. He has worked in investment management since 1993; has managed investment portfolios for Vanguard since 2008; and has co-managed the Long-Term Bond Index Fund since 2010. Education: B.A., Yale University; M.B.A., The Wharton School of the 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 managed the Total Bond Market Index Fund since 1992 (co-managed since 2008). E ducation: 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 shares of 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 make a supplemental distribution at some other time during the year.

Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

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

38


 

outside clearing firm or the Depository Trust Company (DTC)). If a reinvestment service is availabl e, distributions o f i ncome and capital gains can 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 a 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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gain distributions that you receive are taxable to you as ordinary income.

• Any distributions of net long-term capital gains are taxable to you as long-term capital gains, no matter how long you’ve owned ETF Shares.

• 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 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.

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.

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Share Price and Market Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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. However, on those days the value of the Fund’s assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open.

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.

When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 may also be published in the business section of major newspapers.

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Additional Information        
 
 
    Suitable Vanguard CUSIP
  Inception Date for IRA s Fund Number Number
Total Bond Market Index        
ETF Shares 4/3/2007 Yes 928 921937835
  (Investor Shares      
12/11/1986)

Short-Term Bond Index        
ETF Shares 4/3/2007 Yes 924 921937827
  (Investor Shares      
3/1/1994)

Intermediate-Term Bond Index        
ETF Shares 4/3/2007 Yes 925 921937819
  (Investor Shares      
3/1/1994)

Long-Term Bond Index        
ETF Shares 4/3/2007 Yes 927 921937793
  (Investor Shares      
3/1/1994)

 

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or mail.

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 2010 with a net asset value (price) of
$78.31 per share. During the year, each ETF Share earned $2.793 from
investment income (interest) and $2.256 from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $3.149 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior
year’s income or capital gains.
 
The share price at the end of the year was $80.21, reflecting earnings of $5.049
per share and distributions of $3.149 per share. This was an increase of $1.90 per
share (from $78.31 at the beginning of the year to $80.21 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.51% for the year.
 
As of December 31, 2010 , the ETF Shares had approximately $9 billion in net
assets. For the year, the expense ratio was 0.11% ($1.10 per $1,000 of net
assets), and the net investment income amounted to 3.49% of average net
assets. The Fund sold and replaced securities valued at 75% of its net assets.

 

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Total Bond Market ETF        
       
        April 3,
  Year Ended December 31,   2007 1 to
        Dec. 31,
  2 010 2009 2008 2007
Net Asset Value, Beginning of Period $78.31 $76.93 $76.61 $74.95
Investment Operations        
Net Investment Income 2.793 3.163 3.525 2.351
Net Realized and Unrealized Gain (Loss) on Investments 2.256 1.380 .320 1.660
Total from Investment Operations 5.049 4.543 3.845 4.011
Distributions        
Dividends from Net Investment Income (2.793) (3.163) (3.525) (2.351)
Distributions from Realized Capital Gains (.356)
Total Distributions (3.149) (3.163) (3.525) (2.351)
Net Asset Value, End of Period $80.21 $78.31 $76.93 $76.61
Total Return 6.51% 6.03% 5.18% 5.45%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $9,048 $6,242 $2,946 $1,095
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.10% 0.11% 2
Ratio of Net Investment Income to Average Net Assets 3.49% 4.19% 4.83% 5.10% 2
Turnover Rate 3 75% 4 80% 61% 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.        
4 Includes 28% that is attributable to mortgage-dollar-roll activity.        

 

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Short-Term Bond ETF        
 
        April 3,
        2007 1 to
  Year Ended December 31,  
        Dec. 31,
  2 010 2009 2008 2007
Net Asset Value, Beginning of Period $79.35 $78.13 $76.88 $74.95
Investment Operations        
Net Investment Income 1.796 2.196 2.886 2.249
Net Realized and Unrealized Gain (Loss) on Investments 1.359 1.228 1.250 1.930
Total from Investment Operations 3.155 3.424 4.136 4.179
Distributions        
Dividends from Net Investment Income (1.796) (2.196) (2.886) (2.249)
Distributions from Realized Capital Gains (.359) (.008)
Total Distributions (2.155) (2.204) (2.886) (2.249)
Net Asset Value, End of Period $80.35 $79.35 $78.13 $76.88
Total Return 4.00% 4.44% 5.48% 5.67%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $5,640 $3,682 $1,149 $407
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.10% 0.11% 2
Ratio of Net Investment Income to Average Net Assets 2.26% 2.88% 3.88% 4.65% 2
Turnover Rate 3 58% 77% 101% 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.        

 

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Intermediate-Term Bond ETF        
        April 3,
        2007 1 to
  Ye ar Ended December 31,   Dec. 31,
       
  2010 2009 2008 2007
Net Asset Value, Beginning of Period $78.85 $77.19 $76.96 $74.90
Investment Operations        
Net Investment Income 3.326 3.474 3.537 2.389
Net Realized and Unrealized Gain (Loss) on Investments 4.131 1.660 .230 2.060
Total from Investment Operations 7.457 5.134 3.767 4.449
Distributions        
Dividends from Net Investment Income (3.326) (3.474) (3.537) (2.389)
Distributions from Realized Capital Gains (.421)
Total Distributions (3.747) (3.474) (3.537) (2.389)
Net Asset Value, End of Period $82.56 $78.85 $77.19 $76.96
Total Return 9.55% 6.82% 5.07% 6.06%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $1,932 $1,230 $617 $169
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.10% 0.11% 2
Ratio of Net Investment Income to Average Net Assets 4.08% 4.60% 4.90% 4.81% 2
Turnover Rate 3 46% 72% 89% 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.        

 

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Long-Term Bond ETF        
        April 3,
        2007 1 to
  Y ear Ended December 31,   Dec. 31,
       
  2010 2009 2008 2007
Net Asset Value, Beginning of Period $75.91 $78.66 $76.38 $74.90
Investment Operations        
Net Investment Income 3.954 4.005 4.004 2.740
Net Realized and Unrealized Gain (Loss) on Investments 3.836 (2.750) 2.280 1.480
Total from Investment Operations 7.790 1.255 6.284 4.220
Distributions        
Dividends from Net Investment Income (3.954) (4.005) (4.004) (2.740)
Distributions from Realized Capital Gains (.676)
Total Distributions (4.630) (4.005) (4.004) (2.740)
Net Asset Value, End of Period $79.07 $75.91 $78.66 $76.38
Total Return 10.36% 1.79% 8.70% 5.77%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $324 $311 $149 $84
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.10% 0.11% 2
Ratio of Net Investment Income to Average Net Assets 4.98% 5.43% 5.58% 5.41% 2
Turnover Rate 3 54% 69% 67% 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.        

 

CFA ® is a trademark owned by CFA Institute. Vanguard ETFs are not sponsored, endorsed, sold, or promoted by Barclays Capital. Barclays Capital 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 Barclays Capital Index to track general bond market performance. Barclays Capital hereby expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect to the Barclays Capital Index and any data included therein. Barclays Capital’s only relationship to Vanguard and Vanguard ETFs is the licensing of the Barclays Capital Index which is determined, composed, and calculated by Barclays Capital without regard to Vanguard or Vanguard ETFs. Barclays Capital 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: Barclays Capital Global Family of Indices. Copyright 2011, Barclays Capital. All rights reserved.

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Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 issuing 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 the price a dealer is willing to pay for a security (the bid price) and the somewhat higher price at which the dealer is willing to sell the same security (the ask 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 generally to 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.

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 issuing 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.

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).

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

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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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index.

An index that reflects the performance of the Barclays Capital U.S. 1–5 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and Barclays Capital U.S. 1–5 Year Government/Credit Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. 5–10 Year Government/Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. 5–10 Year Government/Credit Float Adjusted Index thereafter.

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Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

Spliced Barclays Capital U.S. Long Government/Credit Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Long Government/ Credit Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted Index thereafter.

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.

49


 

Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information To receive a free copy of the latest annual or
If you would like more information about Vanguard semiannual report or the SAI, or to request additional
Bond ETFs, the following documents are available free information about Vanguard ETF Shares, please visit
upon request: vanguard.com or contact us as follows:
 
Annual/Semiannual Reports to Shareholders The Vanguard Group
Additional information about the Funds’ investments is Institutional Investor Information
available in the Funds’ annual and semiannual reports P.O. Box 2900
to shareholders. In the annual report, you will find a Valley Forge, PA 19482-2900
discussion of the market conditions and investment Telephone: 866-499-8473
strategies that significantly affected the Funds’  
  Information Provided by the Securities and
performance during their last fiscal year.  
  Exchange Commission (SEC)
Statement of Additional Information (SAI) You can review and copy information about the Funds
The SAI for the issuing Funds provides more detailed (including the SAI) at the SEC’s Public Reference Room
information about the Funds’ ETF Shares. in Washington, DC. To find out more about this public
  service, call the SEC at 202-551-8090. Reports and
The SAI and the financial highlights information from  
  other information about the Funds are also available in
the current annual and semiannual reports a re  
  the EDGAR database on the SEC’s Internet site at
incorporated by reference into (and are thus legally a  
  sec.gov , or you can receive copies of this information,
part of) this prospectus.  
  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 20549-1520.
 
  Funds’ Investment Company Act file number: 811-4681

 

© 2011 The Vanguard Group, Inc. All rights reserved.
U.S. Pat. No. 6,879,964 B2, 7,337,138
Vanguard Marketing Corporation, Distributor.

P 984 042011


 

Vanguard Inflation-Protected Securities
Fund Prospectus
 
April 26, 2011
 
Investor Shares & Admiral™ Shares
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Investing With Vanguard 23
More on the Fund 6   Purchasing Shares 23
 The Fund and Vanguard 14   Converting Shares 26
 Investment Advisor 15   Redeeming Shares 27
 Dividends, Capital Gains, and Taxes 16   Exchanging Shares 31
 Share Price 19   Frequent-Trading Policy 31
Financial Highlights 20   Other Rules You Should Know 33
      Fund and Account Updates 37
      Contacting Vanguard 39
      Additional Information 40
    Glossary of Investment Terms 41

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following table describe s the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.

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   None  
Account Service Fee (for fund account balances below $10,000) $20 /year $20 /year
 
Annual Fund Operating Expenses        
(Expenses that you pay each year as a percentage of the value of your investment)      
  Investor Shares   Admiral Shares  
Management Expenses 0.19 % 0.08 %
12b-1 Distribution Fee None   None  
Other Expenses 0.03 % 0.03 %
Total Annual Fund Operating Expenses 0.22 % 0.11 %

 

1


 

Examples

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

          
  1 Year 3 Years 5 Years 10 Years
Investor Shares $ 23 $ 71 $ 124 $ 280
Admiral Shares $ 11 $ 35 $ 62 $ 141

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 29%.

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.”

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.

2


 

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 or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform

relevant benchmarks or other funds with a similar investment objective.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Investor Shares


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 –3.89% (quarter ended December 31, 2008).

3


 

Average Annual Total Returns for Periods Ended December 31, 2010          
  1 Year 5 Years   10 Years  
Vanguard Inflation-Protected Securities Fund Investor Shares            
Return Before Taxes 6.17 % 5.07 % 6.79 %
Return After Taxes on Distributions 5.26   3.77   5.20  
Return After Taxes on Distributions and Sale of Fund Shares 4.00   3.57   4.92  
Barclays Capital U.S. Treasury Inflation Protected            
Securities Index            
(reflects no deduction for fees, expenses, or taxes) 6.31 % 5.33 % 7.02 %
          Since  
          Inception  
          (Jun. 10,  
  1 Year 5 Years   2005 )
Vanguard Inflation-Protected Securities Fund Admiral Shares            
Return Before Taxes 6.31 % 5.19 % 4.82 %
Barclays Capital U.S. Treasury Inflation Protected            
Securities Index            
(reflects no deduction for fees, expenses, or taxes) 6.31 % 5.33 % 4.97 %

 

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 individual 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 may differ for each share class. 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.

4


 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

John W. Hollyer, CFA, Principal of Vanguard. He has co-managed the Fund since its inception in 2000.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has co-managed the Fund since its inception in 2000.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

Account Minimums   Investor Shares   Admiral Shares
To open and maintain an account $ 3,000 $ 50,000
To add to an existing account   $100 (other than by Automatic   $100 (other than by Automatic
    Investment Plan, which   Investment Plan, which
    has no established minimum)   has no established minimum)

 

Tax Information

T he Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 Share s. 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.

All share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

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. Assuming that operating expenses remain as stated under Annual Fund
Operating Expenses, Vanguard Inflation-Protected Securities Fund’s expense
ratios would be as follows: for Investor Shares, 0.22% , or $2.20 per $1,000 of
average net assets; for Admiral Shares, 0.11% , or $1.10 per $1,000 of average net
assets. The average expense ratio for treasury inflation-protected securities funds
in 2010 was 0.82% , or $8.20 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.

 

6


 

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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.

7


 

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 inflation has typically
occurred. However, there have been periods of deflation, such as in 1954 when
the Consumer Price Index (CPI) declined by 0.7%. (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.

 


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. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

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


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.

8


 

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 %.
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.

 


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. A t 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.

9


 

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 nationally recognized statistical rating organizations (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, Inc. (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 Barclays Capital U.S. Treasury Inflation Protected Securities 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.


The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

10


 

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.


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.

11


 

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, oil, or wheat) , 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 F und 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.

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

12


 

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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance .

• Each Vanguard fund (other than money market funds and short-term bond funds) generally prohibits, except as otherwise noted in the Investing With Vanguard

13


 

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 inflation-protected bond funds was approximately 125% , as reported by Morningstar, Inc., on December 31, 2010 .

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 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising.

14


 

Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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.

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Robert F. Auwaerter , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below.

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 in 2000. 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 in 2000. 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 shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its annual 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 make a supplemental distribution 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.

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Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income.

• Any distributions of net long-term capital gains are taxable to you as long-term capital gains, 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.

• 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.

17


 

• Return-of-capital distributions generally are not taxable to you until 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 tax return.

• 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.

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.

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.

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.

 

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.

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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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at van guard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or mail.

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 fiscal year 2010 with a net asset value (price) of $ 12.55 per share.
During the year, each Investor Share earned $ 0.319 from investment income
(interest ) and $ 0.448 from investments that had appreciated in value or that were
sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.317 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 $ 13.00 , reflecting earnings of $ 0.767
per share and distributions of $ 0.317 per share. This was an increase of $ 0.45 per
share (from $ 12.55 at the beginning of the year to $ 13.00 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.17 % for the year.
 
As of December 31, 2010 , the Investor Shares had approximately $ 13 billion in
net assets. For the year, the expense ratio was 0.22 % ($ 2.20 per $1,000 of net
assets), and the net investment income amounted to 2.48 % of average net
assets. The Fund sold and replaced securities valued at 29 % of its net assets.

 

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Inflation-Protected Securities Fund Investor Shares                          
 
                      Feb. 1,
2007 , to
Dec. 31,
   
                                 
    Year Ended December 31,       Year Ended  January 31,  
                                 
    2010     2009     2008     2007 1     2007     2006  
Net Asset Value, Beginning of Period $ 12.55   $ 11.52   $ 12.45   $ 11.80   $ 12.18   $ 12.57  
Investment Operations                                    
Net Investment Income   .319     .210     .614     .651     .483     .573  
Net Realized and Unrealized Gain (Loss)                                    
on Investments   .448     1.034     (.930 )   .646     (.437 )   (.230 )
Total from Investment Operations   .767     1.244     (.316 )   1.297     .046     .343  
Distributions                                    
Dividends from Net Investment Income   (.317 )   (.214 )   (.614 )   (.647 )   (.407 )   (.681 )
Distributions from Realized Capital Gains                       (.052 )
Return of Capital                   (.019 )    
Total Distributions   (.317 )   (.214 )   (.614 )   (.647 )   (.426 )   (.733 )
Net Asset Value, End of Period $ 13.00   $ 12.55   $ 11.52   $ 12.45   $ 11.80   $ 12.18  
Total Return 2   6.17 %   10.80 %   –2.85 %   11.40 %   0.43 %   2.76 %
Ratios/Supplemental Data                                    
Net Assets, End of Period (Millions) $ 12,979   $ 12,946   $ 8,593   $ 6,662   $ 5,361   $ 6,227  
Ratio of Total Expenses to                                    
Average Net Assets   0.22 %   0.25 %   0.20 %   0.20 % 3   0.20 %   0.20 %
Ratio of Net Investment Income to                                    
Average Net Assets   2.48 %   2.00 %   5.02 %   5.92 % 3   3.87 %   4.83 %
Turnover Rate   29 %   14 %   28 %   21 %   53 %   47 %
1 The Fund’s fiscal year-end changed from January 31 to December 31, effective December 31, 2007.              
2 Total returns do not include account service fees that may have applied in the periods shown.              
3 Annualized.                                    

 

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Inflation-Protected Securities Fund Admiral Shares                          
 
                      Feb. 1,
2007 , to
Dec. 31,
  Year
Ended
Jan. 31,
    June 10,
2005 2 to
Jan. 31,
                           
    Year Ended December 31,          
                           
    2010     2009     2008     2007 1     2007     2006  
Net Asset Value, Beginning of Period $ 24.65   $ 22.62   $ 24.45   $ 23.17   $ 23.91   $ 25.00  
Investment Operations                                    
Net Investment Income   .654     .441     1.226     1.299     .971     .683  
Net Realized and Unrealized Gain (Loss)                                    
on Investments   .888     2.037     (1.829 )   1.278     (.858 )   (.432 )
Total from Investment Operations   1.542     2.478     (.603 )   2.577     .113     .251  
Distributions                                    
Dividends from Net Investment Income   (.652 )   (.448 )   (1.227 )   (1.297 )   (.815 )   (1.315 )
Distributions from Realized Capital Gains                       (.026 )
Return of Capital                   (.038 )    
Total Distributions   (.652 )   (.448 )   (1.227 )   (1.297 )   (.853 )   (1.341 )
Net Asset Value, End of Period $ 25.54   $ 24.65   $ 22.62   $ 24.45   $ 23.17   $ 23.91  
Total Return 3   6.31 %   10.96 %   –2.78 %   11.54 %   0.53 %   1.02 %
Ratios/Supplemental Data                                    
Net Assets, End of Period (Millions) $ 11,440   $ 8,723   $ 4,726   $ 3,487   $ 2,523   $ 2,474  
Ratio of Total Expenses to                                    
Average Net Assets   0.11 %   0.12 %   0.11 %   0.11 % 4   0.11 %   0.11 % 4
Ratio of Net Investment Income to                                    
Average Net Assets   2.59 %   2.13 %   5.11 %   6.01 % 4   3.96 %   4.92 % 4
Turnover Rate   29 %   14 %   28 %   21 %   53 %   47 %
1 The Fund’s fiscal year-end changed from January 31 to December 31, effective December 31, 2007.              
2 Inception.                                    
3 Total returns do not include account service fees that may have applied in the periods shown.              
4 Annualized.                                    

 

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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 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. Note that each reference to “you” in this prospectus applies to any one or more registered account owners.

Purchasing Shares

Vanguard reserves the right, without 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.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

Account Minimums for Admiral Shares

To open and maintain an account. $50,000. If you request Admiral Shares when you open a new account, but the investment amount does not meet the account minimum for Admiral Shares, your investment will be placed in Investor Shares of the Fund . Institutional clients should contact Vanguard for information on special eligibility rules that may apply to them.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Policy, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange (the purchase of shares of one Vanguard fund using the

23


 

proceeds of a simultaneous redemption of shares of another Vanguard fund) through our website at van guard.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 call Vanguard to request a purchase of shares in your account . See Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard 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 from a bank account. To establish the electronic bank transfer option on an account, you must designate the 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 from time to time. Your purchase request can be initiated online (if you are a registered user of v anguard.com ), 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 Additional Information .

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are a registered user of v anguard.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 that the New York Stock Exchange (NYSE) is open for trading (a business day).

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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 generally 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 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 Section 403(b)(7) custodial accounts or

• Other retirement plan accounts receiving special administrative services from Vanguar d.

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.

25


 

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 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 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 at the time of the conversion. 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 NAVs of the different share classes on the trade date. NAVs are calculated only on days that 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.

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Conversions From Investor Shares to Admiral Shares

Self-directed conversions. If your account balance in the Fund is at least $50,000, you may ask Vanguard to convert your Investor Shares to Admiral Shares. You can request a conversion online (if you are a registered user of v anguard.com ), by telephone, or by mail. Institutional clients should contact Vanguard for information on special eligibility rules that may apply to them. See Contacting Vanguard .

Automatic conversions. Vanguard conducts periodic reviews of account balances and may, if your account balance in the Fund exceeds $50,000 , 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. Institutional clients should contact Vanguard for information on special eligibility rules that may apply to them.

Conversions to Institutional Shares

You are eligible for a self-directed conversion from another share class to Institutional Shares of the Fund, provided that your account meets all Institutional Shares’ eligibility requirements. Registered users of our website, v anguard.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 Policy , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares and request an exchange (using the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at van guard.com if you are a registered user.

By telephone. You may call Vanguard to request a redemption of shares. See

Contacting Vanguard .

27


 

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 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 redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request 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. To establish t he wire redemption option , you generally must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form.

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 v anguard.com ), by telephone, or by mail.

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, 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.

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• 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 generally 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 generally 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 generally 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 generally 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 of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally 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 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. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the Fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

For further information about redemption transactions, consult our website at vanguard.com or see Contacting Vanguard .

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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 Policy 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 up to a 15-day restriction on your ability to request check redemptions online and by telephone. 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 generally requires the written consent of all registered account owners and may require a signature guarantee or a notarized signature . You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange .

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.

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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 v anguard.com ), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Please note that Vanguard reserves the right, without 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 Policy

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in th e f unds. Each Vanguard fund (other than money market funds and short-term bond funds) 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. ETF Shares are not subject to these frequent-trading limits. The brokerage firm through which you hold your ETF Shares, however, may place certain limits on your ability to purchase and/or sell ETF Shares over any given period .

For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.

The frequent-trading 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 ® .

• 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. (Transaction requests submitted by fax, if otherwise permitted, are not mail transactions and are subject to the policy.)

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• Transfers and reregistrations 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,* 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.

• Reregistrations 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, if otherwise permitted, are not mail requests and are subject to the policy.)

* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

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 revoking the client’s exchange privilege.

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Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (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, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on client 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 summary prospectus (or prospectus) and/or shareholder 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 v anguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions online . You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and shareholder reports electronically. If you are a registered user of v anguard.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 online, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

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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 ® . 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.

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 owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instructions:

Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

Includet he fund name and account number.

Includet he amount of the transaction (stated in dollars, shares, or percentage).

Written instructions also must include :

• Signature guarantees or notarized signatures , if required for the type of transaction.

(Call Vanguard for specifi c r equirements.)

• Any supporting documentation that may be required.

The requirements vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without 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.

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Accounts With More Than One Owner

If an account has more than one owner or authorized person, Vanguard generally 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 or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law.

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 Policy Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the monitoring of frequent trading for accounts held by intermediaries.

Account Service Fee

For most shareholders, Vanguard charges a $20 account service fee on 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 and will be assessed on fund accounts in all Vanguard funds,

35


 

regardless of a fund’s minimum initial investment amount. The 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 v anguard.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 owned in connection with a Vanguard Brokerage Services ® account.

• Accounts held through intermediaries.

• Accounts held by Voyager, Voyager Select, and Flagship clients . Eligibility is based on total household assets held at Vanguard, with a minimum of $50,0 00 to qualify for Vanguard Voyager Services ® , $500,000 for Vanguard Voyager Select Services ® , and $1 million for Vanguard Flagship Services ® . Vanguard determines eligibility by aggregating assets of all qualifying 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 ® , certain annuities through Vanguard, the Vanguard 529 Plan, and certain small-business accounts . Assets in employer-sponsored retirement plans for which Vanguard provides recordkeeping services may be included in determining eligibility if the investor also has a personal account holding Vanguard mutual funds. Note that assets held in a Vanguard Brokerage Services account (other than Vanguard funds, including Vanguard ETFs) are not included when determining a household’s eligibility.

• Participant accounts in employer-sponsored defined contribution plans.* Please consult your enrollment materials for the rules that apply to your account.

• Section 529 college savings plans.

* The following Vanguard fund accounts have alternative fee structures: SIMPLE IRAs, certain Section 403(b)(7) accounts, Vanguard Retirement Investment Program pooled plans, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

Low-Balance Accounts

The Fund reserves the right to liquidate a fund account whose balance falls below the minimum initial investment for any reason, including market fluctuation. This policy applies to nonretirement fund accounts and accounts that are held through intermediaries.

36


 

Right to Change Policies

In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if 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 if Vanguard reasonably believe s 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 purchase fee , redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believe s they are deemed to be in the best interest of a fund.

Share Classes

Vanguard reserves the right, without 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

37


 

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 quarter . 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 Information Statements

For most accounts, we are required to provide annual tax Forms to assist you in preparing your income tax returns. These Forms , which are generally mailed in January, will report the previous year’s dividends, capital gains distributions, proceeds from the sale of shares from taxable accounts, and distributions from IRAs and other retirement plans. Registered users of v anguard.com can also view these Forms online.

Average-Cost Review Statements

For most taxable accounts, an average-cost review statement will accompany the annual Form 1099-B. This statement shows the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, one of the methods established by the IRS and the only method used by Vanguard. You may want to consult a tax professional to determine if a different method is best for you.

Annual and Semiannual Reports

We will send (or provide online, whichever you prefer ) r eports about Vanguard Inflation-Protected Securities Fund twice a year, in February and August. These 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 vanguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund, as of the end of the most recent calendar quarter. 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.

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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 ® 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 800-749-7273) Business hours only: Monday–Friday, 8 a.m. to 10 p.m.,
  Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
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
I nstitutional 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

 

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

 

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Additional Information          
 
  Inception Suitable Newspaper Vanguard CUSIP
  Date for IRAs Abbreviation Fund Number Number
Inflation-Protected Securities          
Investor Shares 6/29/2000 Yes InflaPro 119 922031869
Admiral Shares 6/10/2005 Yes InfProAd 5119 922031737

 

CFA ® is a trademark owned by CFA Institute.

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.

Barclays Capital U.S. Treasury Inflation-Protected Securities Index. An index that includes the inflation-indexed securities within the Barclays Capital Treasury Index, which represents U.S. Treasury obligations with maturities of more than 1 year.

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 generally to 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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

41


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other invest ments.

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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Connect with Vanguard ® > v anguard.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 SAI and the financial highlights information from the current annual and semiannual reports 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 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: 800-749-7273

P.O. Box 2600

Valley Forge, PA 19482-2600

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 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 20549-1520.

Fund’s Investment Company Act file number: 811-4681

© 2011 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

P 119 042011


 

Vanguard Inflation-Protected Securities
Fund Prospectus
 
April 26, 2011
 
Investor Shares for Participants
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Financial Highlights 16
More on the Fund 5 Investing With Vanguard 18
The Fund and Vanguard 13 Accessing Fund Information Online 21
Investment Advisor 13 Glossary of Investment Terms 22
Dividends, Capital Gains, and Taxes 14    
Share Price 15    

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)

Management Expenses 0.19 %
12b-1 Distribution Fee None  
Other Expenses 0.03 %
Total Annual Fund Operating Expenses 0.22 %

 

1


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Y ear 3 Years 5 Years 10 Years
23 71 124 280

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 29%.

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.”

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.

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Manager risk , which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Investor Shares


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 –3.89% (quarter ended December 31, 2008).

Average Annual Total Returns for Periods Ended December 31, 2010          
 
  1 Year 5 Years   10 Years  
Vanguard Inflation-Protected Securities Fund            
Investor Shares 6.17 % 5.07 % 6.79 %
Barclays Capital U.S. Treasury Inflation Protected            
Securities Index            
(reflects no deduction for fees or expenses) 6.31 % 5.33 % 7.02 %

 

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Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

John W. Hollyer, CFA, Principal of Vanguard. He has co-managed the Fund since its inception in 2000.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has co-managed the Fund since its inception in 2000.

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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.

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. Assuming that operating expenses remain as stated under Annual Fund
Operating Expenses, Vanguard Inflation-Protected Securities Fund Investor
Shares’ expense ratio would be 0.22% , or $2.20 per $1,000 of average net assets.
The average expense ratio for treasury inflation-protected securities funds in 2010
was 0.82% , or $8.20 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 a proportionate share of 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.

 

5


 

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.

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 inflation has typically
occurred. However, there have been periods of deflation, such as in 1954 when
the Consumer Price Index (CPI) declined by 0.7%. (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.

 


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.

6


 

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. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

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


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.

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 %.
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.

 


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.

7


 

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. A t 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.

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 nationally recognized statistical rating organizations (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, Inc. (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 Barclays Capital U.S. Treasury inflation Protected

8


 

Securities 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.


The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies 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

9


 

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.


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, oil, or wheat) , 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 the F und 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,

10


 

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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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:

11


 

• 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 because of a history of frequent trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 has 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 inflation-protected bond funds was approximately 125% , as reported by Morningstar, Inc., on December 31, 2010 .

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.

 

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The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , Chief Investment Officer and Managing Director of Vanguard.

As Chief Investment Officer, he is responsible for the oversight of Vanguard’s

13


 

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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below .

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 in 2000. 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 in 2000. 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 shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its annual 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 make a supplemental distribution at some other time during the year. If the Fund has no income to distribute, a dividend will not be paid.

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

14


 

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.

Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or mail.

Plain Talk About How to Read the Financial Highlights Table
 
The Investor Shares began fiscal year 2010 with a net asset value (price) of $ 12.55
per share. During the year, each Investor Share earned $ 0.319 from investment
income (interest ) and $ 0.448 from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.317 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 $ 13.00 , reflecting earnings of $ 0.767
per share and distributions of $ 0.317 per share. This was an increase of $ 0.45 per
share (from $ 12.55 at the beginning of the year to $ 13.00 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.17% for the year.
 
As of December 31, 2010 , the Investor Shares had approximately $ 13 billion in net
assets. For the year, the expense ratio was 0.22 % ($ 2.20 per $1,000 of net
assets), and the net investment income amounted to 2.48 % of average net
assets. The Fund sold and replaced securities valued at 29 % of its net assets.

 

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Inflation-Protected Securities Fund Investor Shares                          
 
                      Feb. 1,
2007 , to
Dec. 31,
  Year Ended  
                                 
    Year Ended December 31,       January 31,  
                                 
    2010     2009     2008     2007 1     2007     2006  
Net Asset Value, Beginning of Period $ 12.55   $ 11.52   $ 12.45   $ 11.80   $ 12.18   $ 12.57  
Investment Operations                                    
Net Investment Income   .319     .210     .614     .651     .483     .573  
Net Realized and Unrealized Gain (Loss)                                    
on Investments   .448     1.034     (.930 )   .646     (.437 )   (.230 )
Total from Investment Operations   .767     1.244     (.316 )   1.297     .046     .343  
Distributions                                    
Dividends from Net Investment Income   (.317 )   (.214 )   (.614 )   (.647 )   (.407 )   (.681 )
Distributions from Realized Capital Gains                       (.052 )
Return of Capital                   (.019 )    
Total Distributions   (.317 )   (.214 )   (.614 )   (.647 )   (.426 )   (.733 )
Net Asset Value, End of Period $ 13.00   $ 12.55   $ 11.52   $ 12.45   $ 11.80   $ 12.18  
Total Return 2   6.17 %   10.80 %   –2.85 %   11.40 %   0.43 %   2.76 %
Ratios/Supplemental Data                                    
Net Assets, End of Period (Millions) $ 12,979   $ 12,946   $ 8,593   $ 6,662   $ 5,361   $ 6,227  
Ratio of Total Expenses to                                    
Average Net Assets   0.22 %   0.25 %   0.20 %   0.20 % 3   0.20 %   0.20 %
Ratio of Net Investment Income to                                    
Average Net Assets   2.48 %   2.00 %   5.02 %   5.92 % 3   3.87 %   4.83 %
Turnover Rate   29 %   14 %   28 %   21 %   53 %   47 %
1 The Fund’s fiscal year-end changed from January 31 to December 31, effective December 31, 2007.              
2 Annualized.                                    

 

17


 

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 Participant Services, 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 its policies without 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

Transaction requests (e.g., a contribution, exchange, or redemption) must be in good order. Good order means that Vanguard has determined that (1) your transaction request includes complete information and (2) appropriate assets are already in your account or new assets have been received.

Processing times for your transaction requests may differ among recordkeepers or among transaction types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing timeframes for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

Your transaction will then be based on the next-determined NAV of the Fund‘s Investor Shares. If your transaction request was received in good order before the close of regular trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that day’s NAV and trade date. NAVs are calculated only on days the NYSE is open for trading.

If Vanguard is serving as your plan recordkeeper, and i f your transaction involves one or more investments with an early cut-off time for processing or an other trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

18


 

Frequent Trading

The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of 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.

If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount . Please note that the 60-day clock restarts after every exchange out of the fund.

The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax, if otherwise permitted, are not mail requests and are subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased 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; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and 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 the Fund’s prospectus. Contact Vanguard Participant Services, 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 for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the intermediary (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, including for the benefit of certain of the

19


 

intermediary’s clients. Intermediaries also may monitor participants’ trading activity with respect to Vanguard funds.

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.

No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.

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 owner, or the account.

Uncashed Checks

Vanguard will not pay interest on uncashed checks.

Portfolio Holdings

We generally post on our website at v anguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

20


 

Additional Information        
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Inflation-Protected Securities Fund        
Investor Shares 06/29/2000 InflaPro 119 922031869

 

Accessing Fund Information Online

Vanguard Online at V anguard.com

V isit Vanguard’s education-oriented website for access to timely news and information about Vanguard funds and services and easy-to-use, interactive tools to help you create your own investment and retirement strategies.

CFA ® is a trademark owned by CFA Institute.

21


 

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.

Barclays Capital U.S. Treasury Inflation-Protected Securities Index. An index that includes the inflation-indexed securities within the Barclays Capital Treasury Index, which represents U.S. Treasury obligations with maturities of more than 1 year.

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 generally to 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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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

22


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other invest ments.

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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Connect with Vanguard ® > v anguard.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 SAI and the financial highlights information from the current annual and semiannual reports a re incorporated by reference into (and are thus legally a part of) this prospectus.

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

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 vanguard.com or contact us as follows:

The Vanguard Group Participant Services 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 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 20549-1520.

Fund’s Investment Company Act file number: 811-4681

© 2011 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 119 042011


 

Vanguard Inflation-Protected Securities
Fund Prospectus
 
April 26, 2011
 
Investor Shares
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Financial Highlights 16
More on the Fund 5 General Information 18
 The Fund and Vanguard 13 Glossary of Investment Terms 20
 Investment Advisor 13    
 Taxes 14    
 Share Price 15    

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)    
 
Management Expenses 0.19 %
12b-1 Distribution Fee None  
Other Expenses 0.03 %
Total Annual Fund Operating Expenses 0.22 %

 

1


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

Year   3 Years 5 Years 10 Years
$ 23 $ 71 $ 124 $ 280

 

This example does not include 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 of the insurance company for the annuity program through which Fund shares are offered.

Portfolio Turnover

The Fund pays transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 29%.

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.”

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;

2


 

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 or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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, which has investment characteristics similar to those of the Fund. 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. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Investor Shares


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 –3.89% (quarter ended December 31, 2008).

3


 

Average Annual Total Returns for Periods Ended December 31, 2010          
 
  1 Year 5 Years   10 Years  
Vanguard Inflation-Protected Securities Fund            
Investor Shares 6.17 % 5.07 % 6.79 %
Barclays Capital U.S. Treasury Inflation Protected            
Securities Index            
(reflects no deduction for fees or expenses) 6.31 % 5.33 % 7.02 %

 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

John W. Hollyer, CFA, Principal of Vanguard. He has co-managed the Fund since its inception in 2000.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has co-managed the Fund since its inception in 2000.

Tax Information

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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

4


 

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund investor. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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.

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 a proportionate share of 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.

 

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

5


 

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.

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 inflation has typically
occurred. However, there have been periods of deflation, such as in 1954 when
the Consumer Price Index (CPI) declined by 0.7%. (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.

 


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

6


 

all to distribute. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

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


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.

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 %.
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.

 


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,

7


 

the average credit quality of the Fund’s holdings is expected to be high and, consequently, credit risk should be low for the Fund. A t 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.

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 nationally recognized statistical rating organizations (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, Inc. (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 Barclays Capital U.S. Treasury Inflation Protected Securities Index as a benchmark for the Fund’s performance, the Fund’s average

8


 

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.


The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies 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.

9


 

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.


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, oil, or wheat) , 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 F und 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,

10


 

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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies, although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period . 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:

11


 

• 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 because of a history of frequent trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance .

• Each Vanguard fund (other than money market funds and short-term bond funds) generally prohibits a contract owner or annuitant from exchanging into a fund contract for 60 calendar days after the contract owner or annuitant has exchanged out of that fund contract.

• 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 inflation-protected bond funds was approximately 125% , as reported by Morningstar, Inc., on December 31, 2010 .

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.

 

12


 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , Chief Investment Officer and Managing Director of Vanguard.

As Chief Investment Officer, he is responsible for the oversight of Vanguard’s

13


 

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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below .

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 in 2000. 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 in 2000. 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 shares of 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.

14


 

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the 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.

15


 

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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or 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.

Plain Talk About How to Read the Financial Highlights Table
 
The Investor Shares began fiscal year 2010 with a net asset value (price) of $ 12.55
per share. During the year, each Investor Share earned $ 0.319 from investment
income (interest ) and $ 0.448 from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.317 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 $ 13.00 , reflecting earnings of $ 0.767
per share and distributions of $ 0.317 per share. This was an increase of $ 0.45 per
share (from $ 12.55 at the beginning of the year to $ 13.00 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.17% for the year.
 
As of December 31, 2010 , the Investor Shares had approximately $ 13 billion in net
assets. For the year, the expense ratio was 0.22 % ($ 2.20 per $1,000 of net
assets), and the net investment income amounted to 2.48 % of average net
assets. The Fund sold and replaced securities valued at 29 % of its net assets.

 

16


 

Inflation-Protected Securities Fund Investor Shares                          
 
                      Feb. 1,
2007 , to
Dec. 31,
   
                                 
    Year Ended December 31,       Year Ended January 31,  
                                 
    2010     2009     2008     2007 1     2007     2006  
Net Asset Value, Beginning of Period $ 12.55   $ 11.52   $ 12.45   $ 11.80   $ 12.18   $ 12.57  
Investment Operations                                    
Net Investment Income   .319     .210     .614     .651     .483     .573  
Net Realized and Unrealized Gain (Loss)                                    
on Investments   .448     1.034     (.930 )   .646     (.437 )   (.230 )
Total from Investment Operations   .767     1.244     (.316 )   1.297     .046     .343  
Distributions                                    
Dividends from Net Investment Income   (.317 )   (.214 )   (.614 )   (.647 )   (.407 )   (.681 )
Distributions from Realized Capital Gains                       (.052 )
Return of Capital                   (.019 )    
Total Distributions   (.317 )   (.214 )   (.614 )   (.647 )   (.426 )   (.733 )
Net Asset Value, End of Period $ 13.00   $ 12.55   $ 11.52   $ 12.45   $ 11.80   $ 12.18  
Total Return   6.17 %   10.80 %   –2.85 %   11.40 %   0.43 %   2.76 %
Ratios/Supplemental Data                                    
Net Assets, End of Period (Millions) $ 12,979   $ 12,946   $ 8,593   $ 6,662   $ 5,361   $ 6,227  
Ratio of Total Expenses to                                    
Average Net Assets   0.22 %   0.25 %   0.20 %   0.20 % 2   0.20 %   0.20 %
Ratio of Net Investment Income to                                    
Average Net Assets   2.48 %   2.00 %   5.02 %   5.92 % 2   3.87 %   4.83 %
Turnover Rate   29 %   14 %   28 %   21 %   53 %   47 %
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 purchase shares of a fund using the proceeds from the simultaneous redemption of 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 the benefit of their clients, we cannot monitor the trading activity of the individual clients. 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 activity, we will seek the assistance of the insurance company to investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of Fund shares by an insurance company, including for the benefit of certain of the insurance company’s clients. Also, 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 vanguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

CFA ® is a trademark owned by CFA Institute.

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.

Barclays Capital U.S. Treasury Inflation-Protected Securities Index. An index that includes the inflation-indexed securities within the Barclays Capital Treasury Index, which represents U.S. Treasury obligations with maturities of more than 1 year.

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 generally to 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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

20


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other invest ments.

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.


 

Connect with Vanguard ® > v anguard.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 SAI and the financial highlights information from the current annual and semiannual reports are incorporated by reference into (and are thus legally a part of) this prospectus.

P.O. Box 2600

Valley Forge, PA 19482-2600

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 v anguard.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 s ec.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 20549-1520.

Fund’s Investment Company Act file number: 811-4681

© 2011 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

P 119A 042011


 

Vanguard Inflation-Protected Securities
Fund Prospectus
 
April 26, 2011
 
Institutional Shares
Vanguard Inflation-Protected Securities Fund Institutional Shares (VIPIX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Investing With Vanguard 22
More on the Fund 6  Purchasing Shares 22
The Fund and Vanguard 14  Converting Shares 25
Investment Advisor 15  Redeeming Shares 26
Dividends, Capital Gains, and Taxes 16  Exchanging Shares 29
Share Price 19  Frequent-Trading Policy 29
Financial Highlights 20  Other Rules You Should Know 31
    Fund and Account Updates 35
    Contacting Vanguard 37
    Additional Information 38
    Glossary of Investment Terms 39

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities.

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)    
 
Management Expenses 0.04 %
12b-1 Distribution Fee None  
Other Expenses 0.03 %
Total Annual Fund Operating Expenses 0.07 %

 

1


 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 7 $ 23 $ 40 $ 90

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 29%.

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.”

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.

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Manager risk , which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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, which has investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Institutional Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.37% (quarter ended March 31, 2009), and the lowest return for a quarter was –3.93% (quarter ended December 31, 2008).

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Average Annual Total Returns for Periods Ended December 31, 2010          
          Since
Inception
(Dec. 12,
2003 )
         
         
  1 Year 5 Years  
Vanguard Inflation-Protected Securities Fund Institutional Shares          
Return Before Taxes 6.33 % 5.21 % 5.20 %
Return After Taxes on Distributions 5.37   3.86   3.60  
Return After Taxes on Distributions and Sale of Fund Shares 4.10   3.65   3.51  
Barclays Capital U.S. Treasury Inflation Protected            
Securities Index            
(reflects no deduction for fees, expenses, or taxes) 6.31 % 5.33 % 5.33 %

 

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 individual 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 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.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

John W. Hollyer, CFA, Principal of Vanguard. He has co-managed the Fund since its inception in 2000.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has co-managed the Fund since its inception in 2000.

Purchase and Sale of Fund Shares

You may purchase or redeem shares online through our website ( v anguard.com ) , by mail (The Vanguard Group, P.O. Box 1110, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Fund’s minimum initial and subsequent investment requirements.

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Account Minimums Institutional Shares
To open and maintain an account $5 million
To add to an existing account $100 (other than by Automatic Investment Plan,
  which has no established minimum)

 

Tax Information

T he Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 i nvest a minimum of $5 million. A separate prospectus offer s I nvestor Shares and Admiral™ Shares, which have investment minimums of $3,000 and $ 50,000 , respectively.

All share classes offered by a Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will vary.

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. Assuming that operating expenses remain as stated under Annual Fund
Operating Expenses, Vanguard Inflation-Protected Securities Fund Institutional
Shares’ expense ratio would be 0.07% , or $0.70 per $1,000 of average net assets.
The average expense ratio for treasury inflation-protected securities funds in 2010
was 0.82% , or $8.20 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.

 

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Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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.

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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 inflation has typically
occurred. However, there have been periods of deflation, such as in 1954 when
the Consumer Price Index (CPI) declined by 0.7%. (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.

 


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. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

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


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.

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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 %.
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.

 


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. A t 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.

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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 nationally recognized statistical rating organizations (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, Inc. (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 Barclays Capital U.S. Treasury Inflation Protected Securities 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.


The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

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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.


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.

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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, oil, or wheat) , 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 F und 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.

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

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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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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 because of a history of frequent trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance .

• Each Vanguard fund (other than money market funds and short-term bond funds) generally prohibits, except as otherwise noted in the Investing With Vanguard

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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 inflation-protected bond funds was approximately 125% , as reported by Morningstar, Inc., on December 31, 2010 .

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 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising.

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Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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.

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Robert F. Auwaerter , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below .

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 in 2000. 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 in 2000. 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 shares of the Fund.

Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its annual 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 make a supplemental distribution 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.

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Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income.

• Any distributions of net long-term capital gains are taxable to you as long-term capital gains, 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.

• 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.

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• Return-of-capital distributions generally are not taxable to you until 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 tax return.

• 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.

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.

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.

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.

 

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.

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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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at van guard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or mail.

Plain Talk About How to Read the Financial Highlights Table
 
The Institutional Shares began fiscal year 2010 with a net asset value (price) of
$ 10.04 per share. During the year, each Institutional Share earned $ 0.271 from
investment income (interest ) and $ 0.359 from investments that had appreciated
in value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.27 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 $ 10.40 , reflecting earnings of $ 0.63
per share and distributions of $ 0.27 per share. This was an increase of $ 0.36 per
share (from $ 10.04 at the beginning of the year to $ 10.40 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.33% for the year.
 
As of December 31, 2010 , the Institutional Shares had approximately $ 8 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 2.63 % of average net
assets. The Fund sold and replaced securities valued at 29 % of its net assets.

 

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Inflation-Protected Securities Fund Institutional Shares                          
                      Feb. 1,
2007 , to
Dec. 31,
           
                                 
    Year ended December 31,       Year Ended Jan. 31,  
                                 
    2010     2009     2008     2007 1     2007     2006  
Net Asset Value, Beginning of Period $ 10.04   $ 9.21   $ 9.96   $ 9.44   $ 9.74   $ 10.06  
Investment Operations                                    
Net Investment Income   .271     .181     .502     .532     .398     .471  
Net Realized and Unrealized Gain (Loss)                                    
on Investments   .359     .834     (.751 )   .521     (.348 )   (.194 )
Total from Investment Operations   .630     1.015     (.249 )   1.053     .050     .277  
Distributions                                    
Dividends from Net Investment Income   (.270 )   (.185 )   (.501 )   (.533 )   (.335 )   (.556 )
Distributions from Realized Capital Gains                       (.041 )
Return of Capital                   (.015 )    
Total Distributions   (.270 )   (.185 )   (.501 )   (.533 )   (.350 )   (.597 )
Net Asset Value, End of Period $ 10.40   $ 10.04   $ 9.21   $ 9.96   $ 9.44   $ 9.74  
Total Return   6.33 %   11.03 %   –2.81 %   11.58 %   0.57 %   2.79 %
Ratios/Supplemental Data                                    
Net Assets, End of Period (Millions) $ 7,720   $ 5,931   $ 3,250   $ 2,248   $ 1,673   $ 1,238  
Ratio of Total Expenses to                                    
Average Net Assets   0.07 %   0.09 %   0.08 %   0.08 % 2   0.08 %   0.08 %
Ratio of Net Investment Income to                                    
Average Net Assets   2.63 %   2.16 %   5.14 %   6.04 % 2   3.99 %   4.95 %
Turnover Rate   29 %   14 %   28 %   21 %   53 %   47 %
1 The Fund’s fiscal year-end changed from January 31 to December 31, effective December 31, 2007.        
2 Annualized.                                    

 

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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 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. Note that each reference to “you” in this prospectus applies to any one or more registered account owners.

Purchasing Shares

Vanguard reserves the right, without 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.

Certain Vanguard institutional clients may meet the minimum investment amount by aggregating up to three separate accounts within the same Fund. This aggregation policy does not apply to clients receiving special administrative services from Vanguard or to omnibus accounts maintained by financial intermediaries.

Institutional clients whose accounts are recordkept by Vanguard generally may hold Institutional Shares if the client has $25 million or more in the Fund. Vanguard may charge certain additional recordkeeping fees. Please contact your Vanguard representative to determine whether additional recordkeeping fees apply to your account.

Add to an existing account. $10 0 ( other than by Automatic Investment Plan, which has no established minimum).

How to Initiate a Purchase Request

Be sure to check Exchanging Shares, Frequent-Trading Policy, and Other Rules You Should Know before placing your purchase request.

Online. You may open certain types of accounts, request a purchase of shares, and request an exchange (the purchase of shares of one Vanguard fund using the

22


 

proceeds of a simultaneous redemption of shares of another Vanguard fund) through our website at van guard.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 call Vanguard to request a purchase of shares in your account . See Contacting Vanguard .

By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard 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 from a bank account. To establish the electronic bank transfer option on an account, you must designate the 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 from time to time. Your purchase request can be initiated online (if you are a registered user of v anguard.com ), 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 (Vanguard—1190).

By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are a registered user of v anguard.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 that 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

23


 

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 generally 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 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 notice, to close your account or take such other steps as we deem reasonable.

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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 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 at the time of the conversion. 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 NAVs of the different share classes on the trade date. NAVs are calculated only on days that 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 Fund, provided that your account meets all Institutional Shares’ eligibility requirements. Registered users of our website, v anguard.com , may request a conversion online, or you may contact Vanguard by telephone or by mail

25


 

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 Policy , and Other Rules You Should Know before placing your redemption request.

Online. You may request a redemption of shares and request an exchange (using the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at van guard.com if you are a registered user.

By telephone. You may call Vanguard to request a redemption of shares. 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 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 redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request 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. To establish t he wire redemption option , you generally must

26


 

designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form.

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 v anguard.com ), by telephone, or by mail.

By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, 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 generally 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 generally 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 generally 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 generally 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

27


 

your trade date. If the date you designated for withdrawal of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date generally 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 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. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may send the proceeds of the redemption to you by check, generally payable to all registered account owners, or use your proceeds to purchase new shares of the Fund from which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should Know—Good Order .

For further information about redemption transactions, consult our website at 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 Policy 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.

28


 

Address change. If you change your address online or by telephone, there may be up to a 15-day restriction on your ability to request check redemptions online and by telephone. 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 generally requires the written consent of all registered account owners and may require a signature guarantee or a notarized signature . You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange .

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 v anguard.com ), by telephone, or by mail. See Purchasing Shares and Redeeming Shares .

If the NYSE is open for regular trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should Know—Good Order for additional information on all transaction requests.

Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.

Please note that Vanguard reserves the right, without 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 Policy

Because excessive transactions can disrupt management of a fund and increase the fund’s costs for all shareholders, the board of trustees of each Vanguard fund places certain limits on frequent trading in th e f unds. Each Vanguard fund (other than money

29


 

market funds and short-term bond funds) 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. ETF Shares are not subject to these frequent-trading limits. The brokerage firm through which you hold your ETF Shares, however, may place certain limits on your ability to purchase and/or sell ETF Shares over any given period .

For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.

The frequent-trading 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 ® .

• 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. (Transaction requests submitted by fax, if otherwise permitted, are not mail transactions and are subject to the policy.)

• Transfers and reregistrations 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,* 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.


 

• Reregistrations 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, if otherwise permitted, are not mail requests and are subject to the policy.)

* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.

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 revoking the client’s exchange privilege.

Accounts Held by Intermediaries

When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (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, including for the benefit of certain of the intermediary’s clients. Intermediaries also may monitor their clients’ trading activities with respect to Vanguard funds.

For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on client 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 summary prospectus (or prospectus) and/or shareholder report when two or more shareholders have the same last name and address. You may

31


 

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 v anguard.com, you can review your account holdings; buy, sell, or exchange shares of most Vanguard funds; and perform most other transactions online . You must register for this service online.

Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and shareholder reports electronically. If you are a registered user of v anguard.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 online, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.

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 ® . 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.

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 owner, or the account.

Good Order

We reserve the right to reject any transaction instructions that are not in “good order.” Good order generally means that your instruction s:

Are provided by the person(s) authorized in accordance with Vanguard’s policies and procedures to access the account and request transactions.

Includet he fund name and account number.

Includet he amount of the transaction (stated in dollars, shares, or percentage).


 

Written instructions also must include :

• Signature guarantees or notarized signatures , if required for the type of transaction.

(Call Vanguard for specifi c r equirements.)

• Any supporting documentation that may be required.

The requirements vary among types of accounts and transactions. For more information, consult our website at vanguard.com or see Contacting Vanguard.

Vanguard reserves the right, without 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 generally 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 or other information that we provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.

Uncashed Checks

Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks.

Dormant Accounts

If your account has no activity in it for a period of time, Vanguard may be required to transfer it to a state under the state’s abandoned property law.

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 Policy Accounts Held by Intermediaries for information about the assessment of any purchase or redemption fees and the 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, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if 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 if Vanguard reasonably believe s 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 purchase fee , redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believe s they are deemed to be in the best interest of a fund.

Share Classes

Vanguard reserves the right, without 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 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 distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar quarter . 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 Information Statements

For most accounts, we are required to provide annual tax Forms to assist you in preparing your income tax returns. These Forms , which are generally mailed in January, will report the previous year’s dividends, capital gains distributions, proceeds from the sale of shares from taxable accounts, and distributions from IRAs and other retirement plans. Registered users of v anguard.com can also view these Forms online.

Average-Cost Review Statements

For most taxable accounts, an average-cost review statement will accompany the annual Form 1099-B. This statement shows the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, one of the methods established by the IRS and the only method used by Vanguard. You may want to consult a tax professional to determine if a different method is best for you.

35


 

Annual and Semiannual Reports

We will send (or provide online, whichever you prefer) r eports about Vanguard Inflation-Protected Securities Fund twice a year, in February and August. These 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 vanguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund, as of the end of the most recent calendar quarter. 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 ® 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 800-749-7273) Business hours only: Monday–Friday, 8 a.m. to 10 p.m.,
  Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
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

 

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

 

37


 

Additional Information          
 
 
      Newspaper Vanguard CUSIP
  Inception Date   Abbreviation Fund Number Number
Inflation-Protected Securities Fund          
Institutional Shares 12/12/2003   InPrSeln 1190 922031745
  (Investor Shares        
  6/29/2000 )      

 

CFA ® is a trademark owned by CFA Institute.

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.

Barclays Capital U.S. Treasury Inflation-Protected Securities Index. An index that includes the inflation-indexed securities within the Barclays Capital Treasury Index, which represents U.S. Treasury obligations with maturities of more than 1 year.

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 generally to 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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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

39


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other invest ments.

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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Connect with Vanguard ® > v anguard.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 SAI and the financial highlights information from the current annual and semiannual reports 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 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: 800-749-7273

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

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: 800-749-7273

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 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 20549-1520.

Fund’s Investment Company Act file number: 811-4681

© 2011 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 1190 042011


 

Vanguard Inflation-Protected Securities
Fund Prospectus
 
April 26, 2011
 
Admiral™ Shares for Participants
Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Financial Highlights 17
More on the Fund 5 Investing With Vanguard 19
The Fund and Vanguard 13 Accessing Fund Information Online 22
Investment Advisor 13 Glossary of Investment Terms 23
Dividends, Capital Gains, and Taxes 15    
Share Price 15    

 


 

Fund Summary

Investment Objective

The Fund seeks to provide inflation protection and income consistent with investment in inflation-indexed securities

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)    
 
Management Expenses 0.08 %
12b-1 Distribution Fee None  
Other Expenses 0.03 %
Total Annual Fund Operating Expenses 0.11 %

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$ 11 $35 $ 62 $ 141

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 29%.

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.”

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 or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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, which has investment characteristics similar to those of the Fund. Keep in mind that the Fund’s past performance does not indicate how the Fund

2


 

will perform in the future. Updated performance information is available on our website at v anguard.com/performance or by calling Vanguard toll-free at 800-662-7447.

Annual Total Returns — Vanguard Inflation-Protected Securities Fund Admiral Shares


During the periods shown in the bar chart, the highest return for a calendar quarter was 5.33% (quarter ended March 31, 2008), and the lowest return for a quarter was –3.90% (quarter ended December 31, 2008).

Average Annual Total Returns for Periods Ended December 31, 2010          
 
          Since
Inception
(Jun. 10,
2005 )
         
         
  1 Year 5 Years  
Vanguard Inflation-Protected Securities Fund            
Admiral Shares 6.31 % 5.19 % 4.82 %
Barclays Capital U.S. Treasury Inflation Protected            
Securities Index            
(reflects no deduction for fees or expenses) 6.31 % 5.33 % 4.97 %

 

Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers

John W. Hollyer, CFA, Principal of Vanguard. He has co-managed the Fund since its inception in 2000.

Kenneth E. Volpert, CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has co-managed the Fund since its inception in 2000.

3


 

Tax Information

The Fund’s 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.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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.

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. Assuming that operating expenses remain as stated under Annual Fund
Operating Expenses, Vanguard Inflation-Protected Securities Fund Admiral
Shares’ expense ratio would be 0.11% , or $1.10 per $1,000 of average net assets.
The average expense ratio for treasury inflation-protected securities funds in 2010
was 0.82% , or $8.20 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 a proportionate share of 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.

 

5


 

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.

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 inflation has typically
occurred. However, there have been periods of deflation, such as in 1954 when
the Consumer Price Index (CPI) declined by 0.7%. (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.

 


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.

6


 

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. If prices throughout the economy decline, the principal and income of an IIS will decline and could result in losses for the Fund.

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


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.

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 %.
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.

 


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.

7


 

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. A t 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.

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 nationally recognized statistical rating organizations (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, Inc. (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 Barclays Capital U.S. Treasury inflation Protected

8


 

Securities 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.


The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies 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

9


 

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.


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, oil, or wheat) , 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 F und 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.

 

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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 and short-term bond funds) do not knowingly accommodate frequent trading. Vanguard ETF ® Shares are not subject to these frequent-trading policies , although the brokerage firm through which ETF Shares are held may place certain limits on the ability to purchase and/or sell ETF Shares over any given period. 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

11


 

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 because of a history of frequent trading by the investor or if Vanguard determines that such purchase may negatively affect a fund’s operation or performance.

• Each Vanguard fund (other than money market funds and short-term bond funds) 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 has 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 inflation-protected bond funds was approximately 125% , as reported by Morningstar, Inc., on December 31, 2010 .

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.

 

The Fund and Vanguard

The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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, 2010 , Vanguard served as advisor for approximately $1.3 trillion in

13


 

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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. See biography below .

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 in 2000. 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 in 2000. 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 shares of the Fund.

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Dividends, Capital Gains, and Taxes

Fund Distributions

The Fund distributes to shareholders virtually all of its annual 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 make a supplemental distribution at some other time during the year. If the Fund has no income to distribute, a dividend will not be paid.

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.

Plain Talk About Distributions
 
As a shareholder, you are entitled to your portion of a fund’s income from interest
as well as capital gains from the fund’s 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.

 

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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.

15


 

When a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at vanguard.com/prices.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at v anguard.com or by contacting Vanguard by telephone or mail.

Plain Talk About How to Read the Financial Highlights Table
 
The Admiral Shares began fiscal year 2010 with a net asset value (price) of $ 24.65
per share. During the year, each Admiral Share earned $ 0.654 from investment
income (interest ) and $ 0.888 from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.652 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 $ 25.54 , reflecting earnings of $ 1.542
per share and distributions of $ 0.652 per share. This was an increase of $ 0.89 per
share (from $ 24.65 at the beginning of the year to $ 25.54 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.31% for the year.
 
As of December 31, 2010 , the Admiral Shares had approximately $ 11.4 billion in
net assets. For the year, the expense ratio was 0.11 % ($ 1.10 per $1,000 of net
assets), and the net investment income amounted to 2.59 % of average net
assets. The Fund sold and replaced securities valued at 29 % of its net assets.

 

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Inflation-Protected Securities Fund Admiral Shares                          
 
                      Feb. 1,
2007 , to
Dec. 31,
  Year
Ended
Jan. 31,
    June 10,
2005 2 to
Jan. 31,
                           
    Year Ended December 31,          
                           
    2010     2009     2008     2007 1     2007     2006  
Net Asset Value, Beginning of Period $ 24.65   $ 22.62   $ 24.45   $ 23.17   $ 23.91   $ 25.00  
Investment Operations                                    
Net Investment Income   .654     .441     1.226     1.299     .971     .683  
Net Realized and Unrealized Gain (Loss)                                    
on Investments   .888     2.037     (1.829 )   1.278     (.858 )   (.432 )
Total from Investment Operations   1.542     2.478     (.603 )   2.577     .113     .251  
Distributions                                    
Dividends from Net Investment Income   (.652 )   (.448 )   (1.227 )   (1.297 )   (.815 )   (1.315 )
Distributions from Realized Capital Gains                       (.026 )
Return of Capital                   (.038 )    
Total Distributions   (.652 )   (.448 )   (1.227 )   (1.297 )   (.853 )   (1.341 )
Net Asset Value, End of Period $ 25.54   $ 24.65   $ 22.62   $ 24.45   $ 23.17   $ 23.91  
Total Return   6.31 %   10.96 %   –2.78 %   11.54 %   0.53 %   1.02 %
Ratios/Supplemental Data                                    
Net Assets, End of Period (Millions) $ 11,440   $ 8,723   $ 4,726   $ 3,487   $ 2,523   $ 2,474  
Ratio of Total Expenses to                                    
Average Net Assets   0.11 %   0.12 %   0.11 %   0.11 % 3   0.11 %   0.11 % 3
Ratio of Net Investment Income to                                    
Average Net Assets   2.59 %   2.13 %   5.11 %   6.01 % 3   3.96 %   4.92 % 3
Turnover Rate   29 %   14 %   28 %   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.                                    

 

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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 Participant Services, 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 its policies without 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

Transaction requests (e.g., a contribution, exchange, or redemption) must be in good order. Good order means that Vanguard has determined that (1) your transaction request includes complete information and (2) appropriate assets are already in your account or new assets have been received.

Processing times for your transaction requests may differ among recordkeepers or among transaction types. Your plan’s recordkeeper (which may also be Vanguard) will determine the necessary processing timeframes for your transaction requests prior to submission to the Fund. Consult your recordkeeper or plan administrator for more information.

Your transaction will then be based on the next-determined NAV of the Fund‘s Admiral Shares. If your transaction request was received in good order before the close of regular trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that day’s NAV and trade date. NAVs are calculated only on days the NYSE is open for trading.

If Vanguard is serving as your plan recordkeeper, and i f your transaction involves one or more investments with an early cut-off time for processing or an other trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.

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Frequent Trading

The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of 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.

If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount . Please note that the 60-day clock restarts after every exchange out of the fund.

The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax, if otherwise permitted, are not mail requests and are subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased 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; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and 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 the Fund’s prospectus. Contact Vanguard Participant Services, 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 for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the intermediary (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, including for the benefit of certain of the

20


 

intermediary’s clients. Intermediaries also may monitor participants’ trading activity with respect to Vanguard funds.

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.

No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.

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 owner, or the account.

Uncashed Checks

Vanguard will not pay interest on uncashed checks.

Portfolio Holdings

We generally post on our website at v anguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

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Additional Information          
 
      Newspaper Vanguard CUSIP
  Inception Date   Abbreviation Fund Number Number
Inflation-Protected Securities Fund          
Admiral Shares 6/10/2005   InfProAd 5119 922031737
  (Investor Shares        
  6/29/2000 )      

 

Accessing Fund Information Online

Vanguard Online at V anguard.com

V isit Vanguard’s education-oriented website for access to timely news and information about Vanguard funds and services and easy-to-use, interactive tools to help you create your own investment and retirement strategies.

CFA ® is a trademark owned by CFA Institute.

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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.

Barclays Capital U.S. Treasury Inflation-Protected Securities Index. An index that includes the inflation-indexed securities within the Barclays Capital Treasury Index, which represents U.S. Treasury obligations with maturities of more than 1 year.

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 generally to 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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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

23


 

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 until your cost basis has been reduced to zero.

Securities. Stocks, bonds, money market instruments, and other invest ments.

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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Connect with Vanguard ® > v anguard.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 SAI and the financial highlights information from the current annual and semiannual reports a re incorporated by reference into (and are thus legally a part of) this prospectus.

Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900

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 vanguard.com or contact us as follows:

The Vanguard Group Participant Services 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 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 20549-1520.

Fund’s Investment Company Act file number: 811-4681

© 2011 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

I 5119 042011


 

Vanguard Total Bond Market II Index Fund
Prospectus
 
April 26, 2011
 
Investor Shares
Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Financial Highlights 21
More on the Fund 6 Investing With Vanguard 23
The Fund and Vanguard 16 Additional Information 23
Investment Advisor 16 Glossary of Investment Terms 24
Dividends, Capital Gains, and Taxes 18    
Share Price 19    

 


 

Fund Summary

Investment Objective

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

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.

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
Account Service Fee (for fund account balances below $10,000) $20/year
 
Annual Fund Operating Expenses  
(Expenses that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.09%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0 .12%

 

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Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

   1 Year              3 Years 5 Years 10 Years
$ 12 $39 $68 $154

 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 105%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted Index. This Index measures 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.

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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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Investor Shares in their first full calendar year. The table shows how the average annual total returns of the Investor Shares compare with those of the Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at institutional.v anguard.com or by calling Vanguard toll-free at 800-662-7447.

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During the periods shown in the bar chart, the highest return for a calendar quarter was 3.59% ( quarter ended June 30, 2010 ), and the lowest return for a quarter was –1.32% (quarter ended December 31, 2010 ).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Jan. 26,
  1 Year 2009)
Vanguard Total Bond Market II Index Fund Investor Shares    
Return Before Taxes 6.42% 6.59%
Return After Taxes on Distributions 5.01 5.18
Return After Taxes on Distributions and Sale of Fund Shares 4.19 4.81
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 6.73%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 6.71

 

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 individual 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 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

4


 

same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Investment Advisor
The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2 010.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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. A separate prospectus offers the Fund’s Institutional Shares, which are for investors who generally do not require special employee benefit plan services and who invest a minimum of $5 million.

Both share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds-of-funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

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. Assuming that operating expenses remain as stated under Annual Fund
Operating Expenses, Vanguard Total Bond Market II Index Fund Investor Shares’
expense ratio would be 0.12% , or $1.20 per $1,000 of average net assets. The
average expense ratio for intermediate investment-grade debt funds in 2010 was
0.91% , or $9.10 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.

 

6


 

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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. Under normal circumstances, the Fund will invest at least 80% of its assets in the bonds that make up its target index. The Fund‘s policy of investing at least 80% of its assets in bonds that are part of its target index may be changed only upon 60 days‘ notice to shareholders.

Market Exposure


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 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.

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.

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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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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 Fund 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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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 .


The 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 moderate for intermediate-term bond funds, so investors should expect the Fund‘s monthly income to fluctuate accordingly.

8


 

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.

 

Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


The Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk for the Fund should be moderate.


The Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner, 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 of investment-grade quality.

9


 

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 nationally recognized statistical rating organizations (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 the Fund is expected to be very high, and thus credit risk should be low.

To a limited extent, the Fund is also exposed to event risk, which is the chance that corporate fixed income securities held by the Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in its target index—which is an indexing strategy called “replication”—the Fund uses index “sampling” techniques to select securities. Using sophisticated computer programs, the Fund’s advisor generally 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, the Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Fund does not hold all the securities in its target index, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target index. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit in the portfolio.


The Fund is subject to 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 Fund’s target index. Index sampling risk for the Fund should be low.

The Fund is generally managed without regard to tax ramifications.

10


 

The number of bonds held by the Fund and the number of bonds in the Fund’s target i ndex were 4,257 and 8,216, respectively, as of December 31, 2010 .

Types of bonds. The Fund’s target index is the Barclays Capital U.S. Aggregate Float Adjusted Index. This Index measures the total universe of public, 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, 2010 , the Fund was composed of the following types of bonds:

  U.S.     International  
  Government/   Mortgage- Dollar- Short-Term
  Agency Corporate Backed Denominated Reserves Total
 
T otal Bond Market II          
Index Fund 45.1% 22.6% 27.3% 3.9% 1.1% 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.

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). The 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.

11


 

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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The 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 the 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 bonds and the prices of U.S. bonds 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.

12


 

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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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

The Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of the 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 index. Subject to the same 20% limit, the Fund may also purchase other investments that are outside of its target index or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Fund 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.

The 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.

13


 


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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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.

 

Vanguard may invest a small portion of the 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

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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 receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Investors eligible to purchase shares of the Fund seek to maintain target asset allocations, which may require frequent rebalancing trades. Because the Fund is available only to such investors, the costs imposed by frequent trading are appropriately borne by the investors who cause them. For this reason, the board of trustees of the Fund has determined that it is not necessary to adopt policies and procedures designed to detect and deter frequent trading and market-timing in the Fund’s shares. For information on frequent-trading limits of other Vanguard funds, please see the appropriate fund’s prospectus.

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 bond funds was approximately 119% , as reported by Morningstar, Inc., on December 31, 2010 .

15


 

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 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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 Fund through its Fixed Income Group. As of December 31, 2010 , Vanguard served as advisor for approximately

16


 

$1.3 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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. He has managed investment portfolios since 1982 and has been with Vanguard since 1992. He received his B.S. from the University of Illinois and an M.B.A. from the University of Chicago.

The manager primarily responsible for the day-to-day management of the Fund is:

Joshua C. Barrickman , CFA, Principal of Vanguar d. H e has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Fund sinc e 2 010. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

The Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of the Fund.

17


 

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. The Fund’s income dividends accrue daily and are distributed monthly; capital gains distributions generally occur annually in December. In addition, the Fund may occasionally make a supplemental distribution 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 capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income.

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

• Capital gains distributions may vary considerably from year to year as a result of the Fund‘s normal investment activities and cash flows.

• A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your 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

18


 

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.

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.

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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, 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

19


 

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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at institutional.v anguard.com.

20


 

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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at institutional . v anguard.com or by contacting Vanguard by telephone or mail.

Plain Talk About How to Read the Financial Highlights Table
 
The Investor Shares began fiscal year 2010 with a net asset value (price) of $ 10.26
per share. During the year, each Investor Share earned $ 0.345 from investment
income (interest) and $0 .308 from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.413 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior year’s
income or capital gains.
 
The share price at the end of the year was $ 10.50 , reflecting earnings of $ 0.653
per share and distributions of $ 0.413 per share. This was an increase of $ 0.24 per
share (from $ 10.26 at the beginning of the year to $ 10.50 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.42% for the year.
 
As of December 31, 2010 , the Investor Shares had approximately $ 27.8 billion in
net assets. For the year, the expense ratio was 0.12 % ($ 1.20 per $1,000 of net
assets), and the net investment income amounted to 3.25 % of average net
assets. The Fund sold and replaced securities valued at 105 % of its net assets.

 

21


 

Total Bond Market II Index Fund Investor Shares    
    January 26,
  Year Ended 2009 1 to
  December 31, December 31,
  2010 2009
Net Asset Value, Beginning of Period $10.26 $10.00
Investment Operations    
Net Investment Income .345 .358
Net Realized and Unrealized Gain (Loss) on Investments .308 .260
Total from Investment Operations .653 .618
Distributions    
Dividends from Net Investment Income (.345) (.358)
Distributions from Realized Capital Gains (.068)
Total Distributions (.413) (.358)
Net Asset Value, End of Period $10.50 $10.26
Total Return 2 6.42% 6.28%
Ratios/Supplemental Data    
Net Assets, End of Period (Millions) $27,807 $20,432
Ratio of Total Expenses to Average Net Assets 0.12% 0.11% 3
Ratio of Net Investment Income to Average Net Assets 3.25% 3.76% 3
Turnover Rat e 105% 4 110%
1 Inception.    
2 Total returns do not include account service fees that may have applied in the periods shown.  
3 Annualized.    
4 Includes 31% that is attributable to mortgage-dollar-roll activity.    

 

22


 

Investing With Vanguard

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds-of-funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

Purchases, redemptions, and exchanges of shares issued by Vanguard Total Bond Market II Index Fund are conducted by Vanguard or its affiliates on behalf of the participating funds, trusts, and accounts.

Transactions will be based on the next-determined NAV of the Fund’s Investor Shares after Vanguard receives the request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the purchase request). If the request is received before the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the investor will receive that day’s NAV and trade date. Transaction requests received after that time will receive a trade date of the first business day following the date of receipt. The trade date may vary, depending on the method of payment for the transaction.

Portfolio Holdings

We generally post on our website at v anguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

Additional Information        
 
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Total Bond Market II Index Fund        
Investor Shares 1/26/2009 TotBd2 635 92203C105

 

CFA ® is a trademark owned by CFA Institute.

23


 

Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

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.


 

Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information If you are a client of Vanguard’s Institutional Division:
If you would like more information about Vanguard The Vanguard Group
Total Bond Market II Index Fund, the following Institutional Investor Information Department
documents are available free upon request: P.O. Box 2900
  Valley Forge, PA 19482-2900
Annual/Semiannual Reports to Shareholders  
  Telephone: 888-809-8102; Text telephone for people
Additional information about the Fund’s investments is  
  with hearing impairment: 800-749-7273
available in the Fund’s annual and semiannual reports  
to shareholders. In the annual report, you will find a If you are a current Vanguard shareholder and would
discussion of the market conditions and investment like information about your account, account
strategies that significantly affected the Fund’s transactions, and/or account statements, please call:
performance during its last fiscal year.  
  Client Services Department
Statement of Additional Information (SAI) Telephone: 800-662-2739 (CREW); Text telephone for
The SAI provides more detailed information about people with hearing impairment: 800-749-7273
the Fund.  
  Information Provided by the Securities and
The SAI and the financial highlights information from Exchange Commission (SEC)
the current annual and semiannual reports are You can review and copy information about the Fund
incorporated by reference into (and are thus legally a (including the SAI) at the SEC’s Public Reference Room
part of) this prospectus. in Washington, DC. To find out more about this public
  service, call the SEC at 202-551-8090. Reports and
To receive a free copy of the latest annual or semiannual  
  other information about the Fund are also available in
report or the SAI, or to request additional information  
  the EDGAR database on the SEC’s Internet site at
about the Fund or other Vanguard funds, please visit  
  sec.gov , or you can receive copies of this information,
vanguard.com or contact us as follows:  
  for a fee, by electronic request at the following e-mail
If you are an individual investor: address: publicinfo@sec.gov, or by writing the Public
The Vanguard Group Reference Section, Securities and Exchange
Investor Information Department Commission, Washington, DC 20549-1520.
P.O. Box 2900  
  Fund’s Investment Company Act file number: 811-4681
Valley Forge, PA 19482-2900  
Telephone: 800-662-7447 (SHIP); Text telephone for  
people with hearing impairment: 800-749-7273  

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

P 635 042011


 

Vanguard Total Bond Market II Index Fund
Prospectus
 
April 26, 2011
 
Institutional Shares
Vanguard Total Bond Market II Index Fund Institutional Shares (VTBNX)
 
 
 
 
This prospectus contains financial data for the Fund through the fiscal year ended December 31, 2010 .
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or
passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

Contents      
 
 
Fund Summary 1 Financial Highlights 21
More on the Fund 6 Investing With Vanguard 23
The Fund and Vanguard 16 Additional Information 23
Investment Advisor 17 Glossary of Investment Terms 24
Dividends, Capital Gains, and Taxes 18    
Share Price 19    

 


 

Fund Summary

Investment Objective

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

Fees and Expenses

The following tabl e describe s the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund.

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 that you pay each year as a percentage of the value of your investment)  
 
Management Expenses 0.04%
12b-1 Distribution Fee None
Other Expenses 0.03%
Total Annual Fund Operating Expenses 0. 07%

 

Example

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 as stated in the preceding table . The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

1 Year          3 Years 5 Years 10 Years
$ 7 $23 $40 $90

 

1


 

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 105%.

Primary Investment Strategies

The Fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted Index. This Index measures 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.

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 of investment-grade quality.

Call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call ( redeem ) securities with higher coupons or interest rates

2


 

before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund’s target index. Index sampling risk for the Fund should be low.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

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 Fund‘s target index and other comparative indexes, which have investment characteristics similar to those of the Fund . Keep in mind that the Fund’s past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at institutional . van guard.com or by calling Vanguard toll-free at 800-662-7447.

3


 


During the periods shown in the bar chart, the highest return for a calendar quarter was 3.60% (quarter ended June 30, 2010), and the lowest return for a quarter was –1.31% (quarter ended December 31, 2010).

Average Annual Total Returns for Periods Ended December 31, 2010    
    Since
    Inception
    (Feb. 17,
  1 Year 2009)
Vanguard Total Bond Market II Index Fund Institutional Shares    
Return Before Taxes 6.47% 6.55%
Return After Taxes on Distributions 5.04 5.13
Return After Taxes on Distributions and Sale of Fund Shares 4.23 4.76
Comparative Indexes    
(reflect no deduction for fees, expenses, or taxes)    
Spliced Barclays Capital U.S. Aggregate Float Adjusted Index 6.58% 6.70%
Barclays Capital U.S. Aggregate Float Adjusted Index 6.58
Barclays Capital U.S. Aggregate Bond Index 6.54 6.68

 

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 individual 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 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.

4


 

Investment Advisor

The Vanguard Group, Inc.

Portfolio Manager

Joshua C. Barrickman, CFA, Principal of Vanguard. He has managed the Fund since 2010.

Tax Information

The Fund’s distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund share s.

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 symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk ® 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 for investors who generally 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, which have an investment minimum of $3,000.

Both share classes offered by the Fund have the same investment objective, strategies, and policies. However, different share classes have different expenses; as a result, their investment performances will differ.

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds-of-funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

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. Assuming that operating expenses remain as stated under Annual Fund
Operating Expenses, Vanguard Total Bond Market II Index Fund Institutional
Shares’ expense ratio would be 0.07% , or $0.70 per $1,000 of average net assets.
The average expense ratio for intermediate investment-grade debt funds in 2010
was 0.91% , or $9.10 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.

 

6


 

Plain Talk About Costs of Investing
 
Costs are an important consideration in choosing a mutual fund. That’s because
you, as a shareholder, pay a proportionate share of 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.

 

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. Under normal circumstances, the Fund will invest at least 80% of its assets in the bonds that make up its target index. The Fund‘s policy of investing at least 80% of its assets in bonds that are part of its target index may be changed only upon 60 days‘ notice to shareholders.

Market Exposure


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 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.

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.

7


 

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 $954 $1,049
Intermediate-Term (10 years) 922 1,086 851 1,180
Long-Term (20 years) 874 1,150 769 1,328
1 Assuming a 4% 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 Fund 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 4%
yield. A year later, interest rates are on the rise and bonds of comparable quality
and maturity are offered with a 5% yield. With higher-yielding bonds available,
you would have trouble selling your 4% 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 3% bonds were being offered, you should be able to sell your 4%
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 .


The 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 moderate for intermediate-term bond funds, so investors should expect the Fund‘s monthly income to fluctuate accordingly.

8


 

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.

 

Although falling interest rates tend to strengthen bond prices, they can cause other sorts of problems for bond fund investors—bond calls and prepayments.


The Fund is subject to call risk, which is the chance that during periods of falling interest rates, issuers of callable bonds may call (redeem ) securities with higher coupons or interest rates before their maturity dates. The Fund would then lose any price appreciation above the bond’s call price 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 Fund invests only a portion of its assets in callable bonds and mortgage-backed securities, call/prepayment risk for the Fund should be moderate.


The Fund is subject to credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner, 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 of investment-grade quality.

9


 

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 nationally recognized statistical rating organizations (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 the Fund is expected to be very high, and thus credit risk should be low.

To a limited extent, the Fund is also exposed to event risk, which is the chance that corporate fixed income securities held by the Fund may suffer a substantial decline in credit quality and market value because of a restructuring of the companies that issued the securities, or because of other factors negatively affecting the issuers.

Security Selection

Index sampling strategy. Because it would be very expensive and inefficient to buy and sell all securities held in its target index—which is an indexing strategy called “replication”—the Fund uses index “sampling” techniques to select securities. Using sophisticated computer programs, the Fund’s advisor generally 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, the Fund keeps industry sector and subsector exposure within tight boundaries relative to its target index. Because the Fund does not hold all the securities in its target index, some of the securities (and issuers) that are held will likely be overweighted (or underweighted) compared with the target index. The maximum overweight (or underweight) is constrained at the issuer level with the goal of producing well-diversified credit in the portfolio.


The Fund is subject to 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 Fund’s target index. Index sampling risk for the Fund should be low.

The Fund is generally managed without regard to tax ramifications.

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The number of bonds held by the Fund and the number of bonds in the Fund’s target i ndex were 4,257 and 8,216, respectively, as of December 31, 2010 .

Types of bonds. The Fund’s target index is the Barclays Capital U.S. Aggregate Float Adjusted Index. This Index measures the total universe of public, 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, 2010 , the Fund was composed of the following types of bonds:

  U.S.     International  
  Government/   Mortgage- Dollar- Short-Term
  Agency Corporate Backed Denominated Reserves              Total
 
Total Bond Market II          
Index Fund 4 5.1% 22.6% 27.3% 3.9% 1.1%             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.

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). The 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.

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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. Mortgage-backed securities issued by the GNMA are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest; those issued by other government agencies or private corporations are not.

The 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 the 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 bonds and the prices of U.S. bonds 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.

12


 

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. In
September of 2008, the U.S. Treasury placed FNMA and FHLMC under
conservatorship and appointed the Federal Housing Finance Agency (FHFA) to
manage their daily operations. In addition, the U.S. Treasury entered into
purchase agreements with FNMA and FHLMC to provide them with capital in
exchange for senior preferred stock. Generally, their securities are neither issued
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

The Fund will invest at least 80% of its assets in bonds held in its target index. Up to 20% of the 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 index. Subject to the same 20% limit, the Fund may also purchase other investments that are outside of its target index or may hold bonds that, when acquired, were included in the index but subsequently were removed. The Fund 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.

The 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.

13


 


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, oil, or wheat ), 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 risk exposure of the Fund. In particular, derivatives will be used only when 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.

 

Vanguard may invest a small portion of the 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.

14


 

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 receives large cash flows that it cannot prudently invest immediately.

Frequent Trading or Market-Timing

Investors eligible to purchase shares of the Fund seek to maintain target asset allocations, which may require frequent rebalancing trades. Because the Fund is available only to such investors, the costs imposed by frequent trading are appropriately borne by the investors who cause them. For this reason, the board of trustees of the Fund has determined that it is not necessary to adopt policies and procedures designed to detect and deter frequent trading and market-timing in the Fund’s shares. For information on frequent-trading limits of other Vanguard funds, please see the appropriate fund’s prospectus.

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 bond funds was approximately 119% , as reported by Morningstar, Inc., on December 31, 2010 .

15


 

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 170 funds holding assets of approximately $1.5 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) 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 (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) 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 private group of individuals, or by public 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.

 

16


 

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 Fund through its Fixed Income Group. As of December 31, 2010 , Vanguard served as advisor for approximately $1.3 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, 2010 , 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 June 30.

Vanguard’s Fixed Income Group is overseen by:

George U. Sauter , 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 , Principal of Vanguard and head of Vanguard’s Fixed Income Group. 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.

Kenneth E. Volpert , CFA, Principal of Vanguard and head of Vanguard’s Taxable Bond Group. He has direct oversight responsibility for all taxable bond funds managed by the Fixed Income Group. He has managed investment portfolios since 1982 and has been with Vanguard since 1992. He received his B.S. from the University of Illinois and an M.B.A. from the University of Chicago.

The manager primarily responsible for the day-to-day management of the Fund is:

Joshua C. Barrickman , CFA, Principal of Vanguar d. H e has been with Vanguard since 1998; has worked in investment management since 1999; has managed investment portfolios since 2005; and has managed the Fund sinc e 2 010. Education: B.S., Ohio Northern University; M.B.A., Lehigh University.

17


 

The Statement of Additional Information provides information about the portfolio manager’s compensation, other accounts under management, and ownership of shares of 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. The Fund’s income dividends accrue daily and are distributed monthly; capital gains distributions generally occur annually in December. In addition, the Fund may occasionally make a supplemental distribution 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 capital gains from the fund’s 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.

 

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 federal income tax points:

• Distributions are taxable to you 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 as if received in December.

• Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income.

• Any distributions of net long-term capital gains are taxable to you as long-term capital gains, 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.

18


 

• 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 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.

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.

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 van guard.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 the distribution and all future distributions until you provide us with a valid mailing address. Reinvestments will receive the net asset value calculated on the date of the reinvestment.

Share Price

Share price, also known as net asset value (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 total assets, minus liabilities, allocated to each share class by the number of Fund

19


 

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 a fund determines that pricing-service information or market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also may use fair-value pricing on bond market holidays when the fund is open for business (such as Columbus Day and Veterans Day).

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 the NAV may differ from quoted or published prices for the same securities.

Vanguard fund share prices are published daily on our website at institutional . vanguard.com.

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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 obtained 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. You may obtain a free copy of the latest annual or semiannual report online at institutional . van guard.com or by contacting Vanguard by telephone or mail.

Plain Talk About How to Read the Financial Highlights Table
 
The Institutional Shares began fiscal year 2010 with a net asset value (price) of
$ 10.26 per share. During the year, each Institutional Share earned $ 0.35 from
investment income (interest) and $ 0.308 from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them.
 
Shareholders received $ 0.418 per share in the form of dividend and capital gains
distributions. A portion of each year’s distributions may come from the prior year’s
income or capital gains.
 
The share price at the end of the year was $ 10.50 , reflecting earnings of $ 0.658
per share and distributions of $ 0.418 per share. This was an increase of $ 0.24 per
share (from $ 10.26 at the beginning of the year to $ 10.50 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return was 6.47% for the year.
 
As of December 31, 2010 , the Institutional Shares had approximately $ 10.6 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 3.30 % of average net
assets. The Fund sold and replaced securities valued at 105 % of its net assets.

 

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Total Bond Market II Index Fund Institutional Shares    
    February 17,
  Year Ended 2009 1 to
  December 31, December 31,
  2010 2009
Net Asset Value, Beginning of Period $10.26 $10.03
Investment Operations    
Net Investment Income .350 .338
Net Realized and Unrealized Gain (Loss) on Investments .308 .230
Total from Investment Operations .658 .568
Distributions    
Dividends from Net Investment Income (.350) (.338)
Distributions from Realized Capital Gains (.068)
Total Distributions (.418) (.338)
Net Asset Value, End of Period $10.50 $10.26
Total Return 6.47% 5.80%
Ratios/Supplemental Data    
Net Assets, End of Period (Millions) $10,629 $7,076
Ratio of Total Expenses to Average Net Assets 0.07% 0.07% 2
Ratio of Net Investment Income to Average Net Assets 3.30% 3.80% 2
Turnover Rate 1 05% 3 110%
1 Inception.    
2 Annualized.    
3 Includes 31% that is attributable to mortgage-dollar-roll activity.    

 

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Investing With Vanguard

Vanguard Total Bond Market II Index Fund has been established by Vanguard as an investment vehicle for Vanguard funds-of-funds as well as certain similar trusts and accounts. The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders.

Purchases, redemptions, and exchanges of shares issued by Vanguard Total Bond Market II Index Fund are conducted by Vanguard or its affiliates on behalf of the participating funds, trusts, and accounts.

Transactions will be based on the next-determined NAV of the Fund’s Investor Shares after Vanguard receives the request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the purchase request). If the request is received before the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the investor will receive that day’s NAV and trade date. Transaction requests received after that time will receive a trade date of the first business day following the date of receipt. The trade date may vary, depending on the method of payment for the transaction.

Portfolio Holdings

We generally post on our website at vanguard.com , in the Portfolio section of the Fund’s Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. 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.

Additional Information        
 
    Newspaper Vanguard CUSIP
  Inception Date Abbreviation Fund Number Number
Total Bond Market II Index Fund        
Institutional Shares 2/17/2009 TotBdInst2 660 92203C204

 

CFA ® is a trademark owned by CFA Institute.

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Glossary of Investment Terms

Active Management. An investment approach that seeks to exceed the average returns of a particular financial market or market segment . 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 generally to 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.

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, internal accounting, legal, and other administrative expenses); any 12b-1 distribution fees; and “other” expenses (usually fees paid to independent third parties, such as the fund’s custodian and auditor) . 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.

Float-Adjusted Index. An index that weights its constituent securities based on the value of the constituent securities that are available for public trading, rather than the value of all constituent securities. Some portion of an issuer’s securities may be unavailable for public trading because, for example, those securities are owned by company insiders on a restricted basis or by a government agency. By excluding unavailable securities, float-adjusted indexes can produce a more accurate picture of the returns actually experienced by investors in the measured market.

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.

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 an advisor to be investment-grade.

Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.

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 invest ments.

Spliced Barclays Capital U.S. Aggregate Float Adjusted Index. An index that reflects the performance of the Barclays Capital U.S. Aggregate Bond Index (not float-adjusted) through December 31, 2009, and performance of the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter.

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.


 

Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900

Connect with Vanguard ® > vanguard.com

For More Information If you are a client of Vanguard’s Institutional Division:
If you would like more information about Vanguard The Vanguard Group
Total Bond Market II Index Fund, the following Institutional Investor Information Department
documents are available free upon request: P.O. Box 2900
  Valley Forge, PA 19482-2900
Annual/Semiannual Reports to Shareholders  
  Telephone: 888-809-8102; Text telephone for people
Additional information about the Fund’s investments is  
  with hearing impairment: 800-749-7273
available in the Fund’s annual and semiannual reports  
to shareholders. In the annual report, you will find a If you are a current Vanguard shareholder and would
discussion of the market conditions and investment like information about your account, account
strategies that significantly affected the Fund’s transactions, and/or account statements, please call:
performance during its last fiscal year.  
  Client Services Department
Statement of Additional Information (SAI) Telephone: 800-662-2739 (CREW); Text telephone for
The SAI provides more detailed information about the Fund. people with hearing impairment: 800-749-7273
 
The SAI and the financial highlights information from Information Provided by the Securities and
the current annual and semiannual reports are Exchange Commission (SEC)
incorporated by reference into (and are thus legally a You can review and copy information about the Fund
part of) this prospectus. (including the SAI) at the SEC’s Public Reference Room
  in Washington, DC. To find out more about this public
To receive a free copy of the latest annual or semiannual  
  service, call the SEC at 202-551-8090. Reports and
report or the SAI, or to request additional information about  
  other information about the Fund are also available in
the Fund or other Vanguard funds, please visit  
  the EDGAR database on the SEC’s Internet site at
vanguard.com or contact us as follows:  
  sec.gov , or you can receive copies of this information,
If you are an individual investor: for a fee, by electronic request at the following e-mail
The Vanguard Group address: publicinfo@sec.gov, or by writing the Public
Investor Information Department Reference Section, Securities and Exchange
P.O. Box 2900 Commission, Washington, DC 20549-1520.
Valley Forge, PA 19482-2900  
  Fund’s Investment Company Act file number: 811-4681
Telephone: 800-662-7447 (SHIP); Text telephone for  
people with hearing impairment: 800-749-7273  

 

© 2011 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.

I 660 042011


 

PART B

VANGUARD ® BOND INDEX FUNDS

STATEMENT OF ADDITIONAL INFORMATION

April 26, 2011

This Statement of Additional Information is not a prospectus but should be read in conjunction with a Fund’s current prospectus (dated April 26, 2011 ). To obtain, without charge, a prospectus or the most recent Annual Report to Shareholders, which contains the Fund’s financial statements as hereby incorporated by reference, please contact The Vanguard Group, Inc. (Vanguard).

Phone: Investor Information Department at 800-662-7447 Online: v anguard.com

TABLE OF CONTENTS
Description of the Trust B -1
Fundamental Policies B -3
Investment Strategies and Nonfundamental Policies B -4
Share Price B -22
Purchase and Redemption of Shares B -22
Management of the Funds B -24
Investment Advisory Services B -39
Portfolio Transactions B -41
Proxy Voting Guidelines B -43
Information About the ETF Share Class B -48
Financial Statements B -54
Description of Bond Ratings B -55

 

DESCRIPTION OF THE TRUST

Vanguard Bond Index Funds (t he Trust ) currently offers the following funds and share classes ( identified by ticker symbol ) :

      Share Classes 1    
Fund 2 Investor Admiral Signal Institutional ETF
Vanguard Total Bond Market Index Fund VBMFX VBTLX VBTSX VBTIX BND
Vanguard Total Bond Market II Index Fund VTBIX VTBNX
Vanguard Short-Term Bond Index Fund VBISX VBIRX VBSSX BSV
Vanguard Intermediate-Term Bond Index Fund VBIIX VBILX VIBSX VBIMX BIV
Vanguard Long-Term Bond Index Fund VBLTX VBLLX BLV
Vanguard Inflation-Protected Securities Fund 3 VIPSX VAIPX VIPIX
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


 

Organization

The Trust was organized as a Maryland corporation in 1986 and was reorganized as a Delaware statutory trust in 1 998. 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-en d m anagement investment company. All Funds within the Trust are classified as diversified within the meaning of the 1940 Act.

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 Fund‘s 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. 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) 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; (2) the trustees determine that it is necessary or desirable to obtain a shareholder vote; (3) a merger or consolidation, share conversion, share exchange, or sale of assets is proposed and a shareholder vote is required by the 1940 Act to approve the transaction; or (4) a shareholder vote is required under the 1940 Act. 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, to change any fundamental policy of a Fund, and to enter into certain merger transactions. 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.

B-2


 

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 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. Each Fund’s shares, when issued, are fully paid and non-assessable.

Tax Status of the Funds

Each Fund expects to qualify each year 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.

FUNDAMENTAL POLICIES

Each Fund is subject to the following fundamental investment policies, 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 borrow money only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

Commodities . Each Fund may invest in commodities only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

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.

Industry Concentration . Each Fund (except Vanguard Inflation-Protected Securities Fund) will not concentrate its investments in the securities of issuers whose principal business activities are in the same industry, except as may be necessary to approximate the composition of its target index.

Vanguard Inflation-Protected Securities Fund will not concentrate its investments in the securities of issuers whose principal business activities are in the same industry.

Investment Objective . The investment objective of the Total Bond Market Index Fund, Total Bond Market II Index Fund, Short-Term Bond Index Fund, Intermediate-Term Bond Index Fund, and Long-Term Bond Index Fund may not be materially changed without a shareholder vote.

Loans . Each Fund may make loans to another person only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

B-3


 

Real Estate . Each Fund may not invest directly in real estate unless it is acquired as a result of ownership of securities or other instruments. This restriction shall not prevent the Fund from investing in securities or other instruments (1) issued by companies that invest, deal, or otherwise engage in transactions in real estate, or (2) backed or secured by real estate or interests in real estate.

Senior Securities . Each Fund may not issue senior securities except as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.

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 Securities Act of 1933 (the 1933 Act), in connection with the purchase and sale of portfolio securities.

Compliance with the fundamental policies previously described is generally measured at the time the securities are purchased. Unless otherwise required by the 1940 Act (as is the case with borrowing) , 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 fundamental policies must comply with applicable regulatory requirements. For more details, see “Investment Strategies and Nonfundamental Policies.”

None of these policies 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.

INVESTMENT STRATEGIES AND NONFUNDAMENTAL POLICIES

Some of the investment strategies and 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 strategies and 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 strategies and policies.

The following investment strategies and policies supplement each Fund’s investment strategies 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 strategies and policies.

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 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

B-4


 

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 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 similar trading practices. (Additional discussion about a number of these transactions can be found on the following pages.) A borrowing transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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 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

B-5


 

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 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

B-6


 

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. Although 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 because of reasons other than inflation (for example, because of 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 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. Non-investment-grade securities generally provide greater income and opportunity for capital appreciation than 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.

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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 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 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 Federal Housing Administration, the Maritime Administration, the Small Business Administration, and the Tennessee Valley Authority. An instrumentality of the U.S.

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government is a government agency organized under Federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, the Federal Deposit Insurance Corporation, 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, because of (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.

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

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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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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.”

Vanguard ETF ® * 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.

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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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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.”

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 previously described in the case of futures contracts. A futures option transaction will not be considered to constitute the issuance, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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.”

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

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relatively small price movement in a futures position may result in immediate and substantial loss (or gain) for 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.

Examples of hybrid instruments include convertible securities, which combine the investment characteristics of bonds and common stocks; p erpetual bonds, which are structured like fixed income securities, have no maturity date, and may be characterized as debt or equity for certain regulatory purposes ; and trust preferred securities, which are preferred stocks of a special purpose trust that holds subordinated debt of the corporate parent. 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.

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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 the limitations 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 requirements 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.

Investing for Control. The Vanguard funds invest in securities and other instruments for the sole purpose of achieving a specific investment objective. As such, they do not seek to acquire enough of a company’s outstanding voting stock to have control over management decisions. The Vanguard funds do not invest for the purpose of controlling a company’s management.

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.

Corporate loans and other forms of direct corporate indebtedness in which a fund may invest generally are made to finance internal growth, mergers, acquisitions, stock repurchases, refinancing of existing debt, leveraged buy-outs, and other corporate activities. A significant portion of the corporate indebtedness purchased by a fund may represent interests in loans or debt made to finance highly leveraged corporate acquisitions, known as “leveraged buy-out” transactions, leveraged recapitalization loans, and other types of acquisition financing. Another portion may also

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represent loans incurred in restructuring or “work-out” scenarios, including super-priority debtor-in-possession facilities in bankruptcy and acquisition of assets out of bankruptcy. Loans in restructuring or “work-out” scenarios may be especially vulnerable to the inherent uncertainties in restructuring processes. In addition, the highly leveraged capital structure of the borrowers in any such transactions, whether acquisition financing or restructuring, may make such loans especially vulnerable to adverse or unusual economic or market conditions.

Loans and other forms of direct indebtedness generally are subject to restrictions on transfer, and only limited opportunities may exist to sell them in secondary markets. As a result, a fund may be unable to sell loans and other forms of direct indebtedness at a time when it may otherwise be desirable to do so or may be able to sell them only at a price that is less than their fair value.

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 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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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.” 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

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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 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 nongovernment issuers, such as commercial banks, 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, which are congressionally chartered corporations. In September 2008, the U.S. Treasury placed FNMA and FHLMC under conservatorship and appointed the Federal Housing Finance Agency (FHFA) to manage their daily operations. In addition, the U.S. Treasury entered into purchase agreements with FNMA and FHLMC to provide them with capital in exchange for senior preferred stock. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. 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

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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 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.

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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 are 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 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. Although 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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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.”

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 instrument 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 instruments and related instruments. 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.

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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. In addition, no funds for which Vanguard acts as an advisor may, in the aggregate, own more than 10% of the voting stock of a closed-end 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 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. The SEC generally limits aggregate holdings of illiquid securities by a mutual fund to 15% of its net assets (5% for money market funds). A fund may experience difficulty valuing and selling illiquid securities and in some cases may be unable to value or sell certain illiquid securities for an indefinite period of time. Illiquid securities may include a wide variety of investments, such as: (1) repurchase agreements maturing in more than seven days (unless the agreements have demand/redemption features); (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) loan interests and other direct debt instruments; (5) municipal lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the 1933 Act; and (7) securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under

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the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security 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. Although a fund’s advisor monitors the liquidity of restricted securities, 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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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.” A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the advisor.

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. Currently, Vanguard funds that lend securities invest the cash collateral received in one or more Vanguard CMT Funds, which are very low-cost money market funds.

The terms and the structure of the loan arrangements, as well as 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.

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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, excess return 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.

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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, 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, 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.

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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 generally must recognize for federal income tax purposes, as of the end of each taxable year, any net unrealized gains and losses on certain futures contracts, as well as any gains and losses 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 securities loans, gains from the sale of securities or 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 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 within this policy.

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.

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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, as extended by the Emergency Economic Stabilization Act of 2008 and later by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, provides relief from U.S. withholding tax for certain properly designated distributions made with respect to a fund’s taxable year beginning prior to 2012 , assuming the investor provides 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 2012 unless so extended by Congres s.

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.

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, by a fund, of a “senior security,” as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset 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.”

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 total assets, minus liabilities, 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

Purchase of Shares (Other Than ETF Shares)

The purchase price of shares of each Fund is the NAV per share next determined after the purchase request is received in good order, as defined in the Fund’s prospectus.

Each Fund, except the Inflation-Protected Securities and Total Bond Market II Index Funds, 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

 

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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 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.

The Trust 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 a 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. 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, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if 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 if Vanguard reasonably believe s 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 purchase fee , redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner’s permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, Vanguard reasonably believe s 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). Each 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 NAV next determined after the order is received by the Authorized Agent.

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MANAGEMENT OF THE FUNDS

Vanguard

Each Fund is part of the Vanguard group of investment companies, which consists of more than 170 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 custodial fees.

The funds’ officers are also officers and employees of Vanguard.

Vanguard, Vanguard Marketing Corporation (VMC), 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.

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, 2010 , the Funds had contributed $34,383 ,000 to Vanguard, which represented 0.02 % of each Fund’s net assets and was 13.74 % 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, 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 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. The funds’ trustees review and approve the marketing and distribution expenses incurred by the funds, 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 its 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.

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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 ® 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 with a third party to provide marketing, promotional, and other services to qualifying Vanguard funds that are distributed in certain foreign countries on a private-placement basis to government-sponsored and other institutional investors. In exchange for such services, the third party receives an annual base (fixed) fee, and may also receive discretionary fees or performance adjustments.

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

B-25


 

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.

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 Fund 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, 2008, 2009, and 2010, and are presented as a percentage of Fund's average month-end net assets.

Annual Shared Fund Operating Expenses
(Shared Expenses Deducted from Fund Assets)

Fund 2008   2009   2010  
Vanguard Total Bond Market Index Fund            
Management and Administrative Expenses: 0.12 % 0.11 % 0.10 %
Marketing and Distribution Expenses: 0.03   0.03   0.03  
Vanguard Total Bond Market II Index Fund 1            
Management and Administrative Expenses:   0.09 % 0.08 %
Marketing and Distribution Expenses:   0.01   0.03  
Vanguard Short-Term Bond Index Fund            
Management and Administrative Expenses: 0.11 % 0.12 % 0.11 %
Marketing and Distribution Expenses: 0.03   0.03   0.03  
Vanguard Intermediate-Term Bond Index Fund            
Management and Administrative Expenses: 0.11 % 0.12 % 0.11 %
Marketing and Distribution Expenses: 0.03   0.03   0.03  
Vanguard Long-Term Bond Index Fund            
Management and Administrative Expenses: 0.13 % 0.16 % 0.14 %
Marketing and Distribution Expenses: 0.03   0.03   0.03  
Vanguard Inflation-Protected Securities Fund            
Management and Administrative Expenses: 0.11 % 0.15 % 0.12 %
Marketing and Distribution Expenses: 0.04   0.03   0.03  
1 Vanguard Total Bond Market II Index Fund did not commence operations until January 2009.          

 

Officers and Trustees

Each Vanguard fund is governed by the board of trustees of its trust and a single set of officers. Consistent with the board’s corporate governance principles, the trustees believe that their primary responsibility is oversight of the management of each fund for the benefit of its shareholders, not day-to-day management. The trustees set broad policies for the funds; select investment advisors; monitor fund operations, regulatory compliance, performance, and costs; nominate and select new trustees; and elect fund officers. Vanguard manages the day-to-day operations of the funds under the direction of the board of trustees.

The trustees play an active role, as a full board and at the committee level, in overseeing risk management for the funds. The trustees delegate the day-to-day risk management of the funds to various groups, including portfolio review, investment management, risk management, compliance, legal, fund accounting, and fund financial services. These groups provide the trustees with regular reports regarding investment, valuation, liquidity, and compliance, as well as the risks associated with each. The trustees also oversee risk management for the funds through regular interactions with the funds’ internal and external auditors.

The full board participates in the funds’ risk oversight, in part, through the Vanguard funds’ compliance program which covers the following broad areas of compliance: investment and other operations; recordkeeping; valuation and pricing; communications and disclosure; reporting and accounting; oversight of service providers; fund governance; and code of ethics, insider trading controls, and protection of nonpublic information. The program seeks to identify and assess risk

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through various methods, including through regular interdisciplinary communications between compliance professionals and business personnel who participate on a daily basis in risk management on behalf of the funds. The funds’ chief compliance officer regularly provides reports to the board in writing and in person.

The audit committee of the board, which is composed of all independent trustees, oversees management of financial risks and controls. The audit committee serves as the channel of communication between the independent auditors of the funds and the board with respect to financial statements and financial-reporting processes, systems of internal control, and the audit process. The head of internal audit reports directly to the audit committee and provides reports to the committee in writing and in person on a regular basis. Although the audit committee is responsible for overseeing the management of financial risks, the entire board is regularly informed of these risks through committee reports.

All of the trustees bring to each fund’s board a wealth of executive leadership experience derived from their service as executives (in many cases chief executive officers), board members, and leaders of diverse public operating companies, academic institutions, and other organizations. In determining whether an individual is qualified to serve as a trustee of the funds, the board considers a wide variety of information about the trustee, and multiple factors contribute to the board’s decision. Each trustee is determined to have the experience, skills, and attributes necessary to serve the funds and their shareholders because each trustee demonstrates an exceptional ability to consider complex business and financial matters, evaluate the relative importance and priority of issues, make decisions, and contribute effectively to the deliberations of the board. The board also considers the individual experience of each trustee and determines that the trustee’s professional experience, education, and background contribute to the diversity of perspectives on the board. The business acumen, experience, and objective thinking of the trustees are considered invaluable assets for Vanguard management and, ultimately, the Vanguard funds’ shareholders. The specific roles and experience of each board member that factor into this determination are presented below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.

              Number of
          Vanguard Principal Occupation(s) Vanguard Funds
        Position(s) Funds’ Trustee/ and Outside Directorships Overseen by
  Name, Year of Birth Held with Funds Officer Since During the Past Five Years Trustee/Officer
  Interested Trustee 1        
  F. William   McNabb Chairman of the July 2009 Mr. McNabb has served as Chairman of the Board of 179
III (1957 )   Board, Chief   Vanguard and of each of the investment companies  
        Executive Officer,   served by Vanguard, since January 2010; Trustee of  
        and President   each of the investment companies served by  
            Vanguard, since 2009; Director of Vanguard since  
            2008; and Chief Executive Officer and President of  
            Vanguard and of each of the investment companies  
            served by Vanguard, since 2008. Mr. McNabb also  
            serves as Director of Vanguard Marketing Corporation .  
            Mr. McNabb served as a Managing Director of  
            Vanguard from 1995 to 2008. Mr. McNabb’s 24 years  
            with Vanguard and his position as chief executive  
            officer of Vanguard and the Vanguard funds give him  
            intimate experience with the day-to-day management  
            and operations of the Vanguard funds.  

 

1 Mr. McNabb is considered an “interested person,” as defined in the 1940 Act, because he is an officer of the Trust.

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          Number of
      Vanguard Principal Occupation(s) Vanguard Funds
    Position(s) Funds’ Trustee/ and Outside Directorships Overseen by
Name, Year of Birth   Held with Funds Officer Since During the Past Five Years Trustee/Officer
Independent Trustees          
Emerson U. Fullwood   Trustee January 2008 Mr. Fullwood is the former Executive Chief Staff and 179
(1948 )     Marketing Officer for North America and Corporate  
        Vice President (retired 2008) of Xerox Corporation  
        (document management products and services).  
        Previous positions held at Xerox by Mr. Fullwood  
        include President of the Worldwide Channels Group,  
        President of Latin America, Executive Chief Staff Officer  
        of Developing Markets, and President of Worldwide  
        Customer Services. Mr. Fullwood is the Executive in  
        Residence and 2010 Distinguished Minett Professor at  
        the Rochester Institute of Technology. Mr. Fullwood  
        serves as a director of SPX Corporation (multi-industry  
        manufacturing) , Amerigroup Corporation (managed  
        health care) , the University of Rochester Medical  
        Center, Monroe Community College Foundation, the  
        United Way of Rochester , and North Carolina A&T  
        University . Mr. Fullwood brings to the board particular  
        experience with marketing, organizational development,  
        and operations management.  
 
Rajiv L. Gupta   Trustee December 2001 Mr. Gupta is the former Chairman and Chief Executive 179
(1945 )     Officer (retired 2009) and President (2006–2008) of  
        Rohm and Haas Co. (chemicals). Mr. Gupta serves as a  
        director of Tyco International, Ltd. (diversified  
        manufacturing and services ), and Hewlett-Packard  
        Company (electronic computer manufacturing); as  
        Senior Advisor at New Mountain Capital; as a trustee of  
        The Conference Board; and on the Board of Managers  
        of Delphi Automotive LLP (automotive components).  
        Mr. Gupta brings to the board particular experience  
        with finance, capital markets, and global operations.  
 
Amy Gutmann   Trustee June 2006 Dr. Gutmann serves as the President of the University 179
(1949 )     of Pennsylvania. She is the Christopher H. Browne  
        Distinguished Professor of Political Science in the  
        School of Arts and Sciences with secondary  
        appointments at the Annenberg School for  
        Communication and the Graduate School of Education  
        at the University of Pennsylvania. Dr. Gutmann also  
        serves as a director of Carnegie Corporation of New  
        York, Schuylkill River Development Corporation, and  
        Greater Philadelphia Chamber of Commerce; and as a  
        trustee of the National Constitution Center.  
        Dr. Gutmann is Chair of the Presidential Commission  
        for the Study of Bioethical Issues. Dr. Gutmann brings  
        to the board particular experience with community and  
        organizational development, education, ethics, and  
        public policy.  

 

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          Number of
      Vanguard Principal Occupation(s) Vanguard Funds
    Position(s) Funds’ Trustee/ and Outside Directorships Overseen by
Name, Year of Birth   Held with Funds Officer Since During the Past Five Years Trustee/Officer
JoAnn Heffernan Heisen   Trustee July 1998 Ms. Heisen is the former Corporate Vice President 179
(1950 )     and Chief Global Diversity Officer (retired 2008)  
        and a former Member of the Executive Committee  
        ( 1997– 2008) of Johnson & Johnson (pharmaceuticals/  
        consumer products). Ms. Heisen served as Vice  
        President and Chief Information Officer of Johnson &  
        Johnson from 1997 to 2005 . Ms. Heisen serves as a  
        director of Skytop Lodge Corporation (hotels), t he  
        University Medical Center at Princeton , the Robert  
        Wood Johnson Foundation, and the Center for Work  
        Life Policy ; and as a member of the advisory board of  
        the Maxwell School of Citizenship and Public Affairs at  
        Syracuse University. Ms. Heisen brings to the board  
        particular experience with human resources, and  
        financial and information technology matters.  
 
F. Joseph Loughrey   Trustee October 2009 Mr. Loughrey is the former President and Chief 179
(1949 )     Operating Officer (retired 2009) and Vice Chairman of  
        the Board (2008–2009) of Cummins Inc. (industrial  
        machinery). Mr. Loughrey serves as a director of  
        SKF AB (industrial machinery), Hillenbrand, Inc.  
        (specialized consumer services), the Lumina  
        Foundation for Education, and Oxfam America; and as  
        Chairman of the Advisory Council for the College of  
        Arts and Letters and Member of the Advisory Board to  
        the Kellogg Institute for International Studies a t the  
        University of Notre Dame. Mr. Loughrey served as a  
        director of Sauer-Danfoss Inc. (machinery) from 2000  
        to 2010, and of Tower Automotive Inc. (manufacturer  
        of automobile components) from 1994 to 2007.  
        Mr. Loughrey brings to the board particular experience  
        with global operations, technology, and risk and human  
        resources management.  
 
André F. Perold   Trustee December 2004 Mr. Perold is the George Gund Professor of Finance 179
(1952 )     and Banking at the Harvard Business School, and Chair  
        of the Investment Committee of HighVista Strategies  
        LLC (private investment firm). From 2003 to 2009,  
        Mr. Perold served as chairman of the board of UNX,  
        Inc. (equities trading firm). Mr. Perold brings to the  
        board particular experience with investment  
        management and finance.  
 
Alfred M. Rankin, Jr.   Lead January 1993 Mr. Rankin serves as Chairman, President, and Chief 179
(1941 ) Independent   Executive Officer of NACCO Industries, Inc. (forklift  
    Trustee   trucks/housewares/lignite). Mr. Rankin also serves as a  
        director of Goodrich Corporation (industrial products/  
        aircraft systems and services) and the National  
        Association of Manufacturers ; Chairman of the Federal  
        Reserve Bank of Cleveland; Vice Chairman o f  
        University Hospitals of Cleveland; and President of the  
        Board of The Cleveland Museum of Art. Mr. Rankin  
        brings to the board particular experience with finance,  
        capital markets, and risk and operations management.  

 

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          Number of
      Vanguard Principal Occupation(s) Vanguard Funds
    Position(s) Funds’ Trustee/ and Outside Directorships Overseen by
Name, Year of Birth   Held with Funds Officer Since During the Past Five Years Trustee/Officer
Peter F. Volanakis(1955)   Trustee July 2009 Mr. Volanakis is the retired President and Chief 179
        Operating Officer (retired 2010) of Corning  
        Incorporated (communications equipment).  
        Mr. Volanakis served as a director of Corning  
        Incorporated (2000 2010) and of Dow Corning (2001  
        2010). Mr. Volanakis serves as Overseer of the Amos  
        Tuck School of Business Administration at Dartmouth  
        College. Mr. Volanakis brings to the board particular  
        experience with international operations, marketing,  
        and corporate development.  
 
Executive Officers          
Glenn Booraem   Controller July 2010 Mr. Booraem, a Principal of Vanguard, has served as 179
(1967 )     Controller of each of the investment companies served  
        by Vanguard, since 2010. Mr. Booraem served as  
        Assistant Controller of each of the investment  
        companies served by Vanguard, from 2001 to 2010.  
 
Thomas J. Higgins   Chief Financial September 2008 Mr. Higgins, a Principal of Vanguard, has served as 179
(1957 ) Officer   Chief Financial Officer of each of the investment  
        companies served by Vanguard, since 2008. Mr.  
        Higgins served as Treasurer of each of the investment  
        companies served by Vanguard , from 1998 to 2008.  
 
Kathryn J. Hyatt   Treasurer November 2008 Ms. Hyatt, a Principal of Vanguard, has served as 179
(1955 )     Treasurer of each of the investment companies served  
        by Vanguard, since 2008. Ms. Hyatt served as  
        Assistant Treasurer of each of the investment  
        companies served by Vanguard , from 1988 to 2008.  
 
Heidi Stam   Secretary July 2005 Ms. Stam has served as a Managing Director of 179
(1956 )     Vanguard since 2006; General Counsel of Vanguard  
        since 2005; Secretary of Vanguard and of each of the  
        investment companies served by Vanguard, since  
        2005; and Director and Senior Vice President of  
        Vanguard Marketing Corporation since 2005. Ms. Stam  
        served as a Principal of Vanguard from 1997 to 2006.  

 

All but one of the trustees are independent. The independent trustees designate a lead independent trustee. The lead independent trustee is a spokesperson and principal point of contact for the independent trustees and is responsible for coordinating the activities of the independent trustees, including calling regular executive sessions of the independent trustees; developing the agenda of each meeting together with the chairman; and chairing the meetings of the independent trustees, including the meetings of the audit, compensation, and nominating committees.

The independent trustees appoint the chairman of the board. The roles of chairman of the board and chief executive officer currently are held by the same person. The independent trustees generally believe that the Vanguard funds’ chief executive officer is best qualified to serve as chairman and that fund shareholders benefit from this leadership structure through accountability and strong day-to-day leadership.

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 three meetings during the Funds‘ last fiscal year.

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  • 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 two 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 three 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.

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. McNabb serves as 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.

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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 the   Benefit at   Funds Paid
Trustee   from the Funds 1   Funds’ Expenses 1   January 1, 2010 2   to Trustees 3
F. William McNabb III        
Emerson U. Fullwood $ 30,789     $ 205,000
Rajiv L. Gupta   30,789       205,000
Amy Gutmann   30,789       199,200
JoAnn Heffernan Heisen   30,789 $ 709 $ 3,395   205,000
F. Joseph Loughrey   30,789       205,000
André F. Perold   30,789       199,200
Alfred M. Rankin, Jr.   35,293   1,388   6,653   235,000
Peter F. Volanakis   30,789       205,000

 

1       The amounts shown in this column are based on the Trust‘s fiscal year ended December 31, 2010 . 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 179 Vanguard funds for the 2010 calendar yea r.

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, 2010.

    Dollar Range Aggregate Dollar Range of
    of Fund Shares Vanguard Fund Shares
Fund Trustee Owned by Trustee Owned by Trustee
Vanguard Total Bond Market Index Fund Emerson U. Fullwood Over $100,000
  Rajiv L. Gupta Over $100,000
  Amy Gutmann Over $100,000
  JoAnn Heffernan Heisen Over $100,000
  F. Joseph Loughrey Over $100,000
  F. William McNabb III Over $100,000 Over $100,000
  André F. Perold Over $100,000
  Alfred M. Rankin, Jr. Over $100,000
  Peter F. Volanakis Over $100,000 Over $100,000
 
Vanguard Total Bond Market II Index Fund Emerson U. Fullwood Over $100,000
  Rajiv L. Gupta Over $100,000
  Amy Gutmann Over $100,000
  JoAnn Heffernan Heisen Over $100,000
  F. Joseph Loughrey Over $100,000
  F. William McNabb III Over $100,000
  André F. Perold Over $100,000
  Alfred M. Rankin, Jr. Over $100,000
  Peter F. Volanakis Over $100,000

 

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      Dollar Range Aggregate Dollar Range of
      of Fund Shares Vanguard Fund Shares
Fund Trustee   Owned by Trustee Owned by Trustee
Vanguard Short-Term Bond Index Fund Emerson U. Fullwood   Over $100,000
  Rajiv L. Gupta   Over $100,000
  Amy Gutmann   Over $100,000
  JoAnn Heffernan Heisen   Over $100,000
  F. Joseph Loughrey   Over $100,000
  F. William McNabb III   Over $100,000
  André F. Perold   Over $100,000
  Alfred M. Rankin, Jr.   Over $100,000
  Peter Volanakis   Over $100,000
 
Vanguard Intermediate-Term Bond Index Fund Emerson U. Fullwood   Over $100,000
  Rajiv L. Gupta   Over $100,000
  Amy Gutmann   Over $100,000
  JoAnn Heffernan Heisen   Over $100,000
  F. Joseph Loughrey   Over $100,000
  F. William McNabb III   Over $100,000
  André F. Perold   Over $100,000
  Alfred M. Rankin, Jr.   Over $100,000
  Peter Volanakis   Over $100,000
 
Vanguard Long-Term Bond Index Fund Emerson U. Fullwood   Over $100,000
  Rajiv L. Gupta   Over $100,000
  Amy Gutmann   Over $100,000
  JoAnn Heffernan Heisen   Over $100,000
  F. Joseph Loughrey   Over $100,000
  F. William McNabb III   Over $100,000
  André F. Perold   Over $100,000
  Alfred M. Rankin, Jr.   Over $100,000
  Peter Volanakis   Over $100,000
 
Vanguard Inflation-Protected Securities Fund Emerson U. Fullwood   Over $100,000
  Rajiv L. Gupta   Over $100,000
  Amy Gutmann   Over $100,000
  JoAnn Heffernan Heisen   Over $100,000
  F. Joseph Loughrey   Over $100,000
  F. William McNabb III   Over $100,000
  André F. Perold   Over $100,000
  Alfred M. Rankin, Jr.   Over $100,000
  Peter Volanakis $ 10,001–$50,000 Over $100,000

 

As of March 31, 2011 , 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, 2011 , the following owned of record 5% or more of each class’s outstanding shares:

Vanguard Total Bond Market Index Fund—Investor Shares: Charles Schwab & Company, Inc., San Francisco, CA (9.17%), National Financial Services Corporation, New York, NY (7.25%); Vanguard Total Bond Market Index Fund—Institutional Shares: Fidelity Investments, Covington, KY (9.72%), National Financial Services Corporation, New York, NY (7.55%); Vanguard Total Bond Market Index Fund—Institutional Plus Shares: State of Utah Educational Savings Plan, Salt Lake

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City, UT (10.99%), Fidelity Investments, Covington, KY (8.64%); Vanguard Total Bond Market Index Fund—Signal Shares: Charles Schwab & Company, Inc., San Francisco, CA (14.73%), National Financial Services Corporation, New York, NY (10.59%); Vanguard Total Bond Market II Index Fund—Investor Shares: Vanguard Target Retirement 2015 Fund, Malvern, PA (19.16%), Vanguard Target Retirement 2025 Fund, Malvern, PA (14.27%), Vanguard Target Retirement 2020 Fund, Malvern, PA (12.75%), LifeStrategy Moderate Growth Fund, Valley Forge, PA (9.08%), LifeStrategy Conservative Growth Fund, Valley Forge, PA (6.90%), Vanguard Target Retirement 2010 Fund, Malvern, PA (6.55%), Vanguard Target Retirement Income Fund, Malvern, PA (6.47%), Vanguard Target Retirement 2030 Fund, Malvern, PA (5.33%); Vanguard Total Bond Market II Index Fund—Institutional Shares: NY College Savings Program Conservative Growth Portfolio, Newton, MA (9.64%), Vanguard Target Retirement Trust 2020, Malvern, PA (9.19%), Vanguard Target Retirement Trust 2015, Malvern, PA (7.61%), NY College Savings Program Moderate Growth Portfolio, Newton, MA (7.36%), Vanguard Target Retirement Trust 2025, Malvern, PA (5.86%), NY College Savings Program Income Portfolio, Newton, MA (5.45%); Vanguard Short-Term Bond Index Fund—Investor Shares: Charles Schwab & Company, Inc., San Francisco, CA (21.50%), National Financial Services Corporation, New York, NY (20.73%), Prudential Investment Management Services LLC, Newark, NJ (7.47%); Vanguard Short-Term Bond Index Fund—Signal Shares: National Financial Services Corporation, New York, NY (15.87%), Charles Schwab & Company, Inc., San Francisco, CA (11.10%); Vanguard Intermediate-Term Bond Index Fund—Investor Shares: National Financial Services Corporation, New York, NY (17.03%), Charles Schwab & Company, Inc., San Francisco, CA (15.27%); Vanguard Intermediate-Term Bond Index Fund—Institutional Shares: The Northern Trust Company, Chicago, IL (13.79%), Mitra & Company FBO 98, Milwaukee, WI (10.57%), T Rowe Price Retirement Services Inc. Trustee for Clorox Company 401(k) Plan, Owings Mills, MD (8.43%), Sompo Japan Insurance Company of America, New York, NY (7.73%), UBS Financial Services Inc. FBO Disabled American Veteran General Fund, Cold Springs, KY (7.36%), Texas Tech University System, Lubbock, TX (5.37%), Children’s Hospital, New Orleans, LA (5.35%); Vanguard Intermediate-Term Bond Index Fund—Signal Shares: National Financial Services Corporation, New York, NY (12.13%), Minnesota Mutual Life, Saint Paul, MN (12.10%), Charles Schwab & Company, Inc., San Francisco, CA (9.84%), Fidelity Investments Institutional Operations, Covington, KY (5.25%); Vanguard Long-Term Bond Index Fund—Investor Shares: National Financial Services Corporation, New York, NY (5.30%); Vanguard Long-Term Bond Index Fund—Institutional Shares: National Financial Services Corporation, New York, NY (12.91%), Mac & Company A/C KPTF7031962, Pittsburgh, PA (9.30%), Mac & Company A/C AECF3010002, Pittsburgh, PA (8.90%), Mac & Company A/C CYTF2129002, Pittsburgh, PA (8.90%), Wells Fargo Bank NA FBO Community Hospital, Minneapolis, MN (6.80%); Vanguard Inflation-Protected Securities Fund—Investor Shares: Charles Schwab & Company, Inc., San Francisco, CA (16.49%), National Financial Services Corporation, New York, NY (13.31%), Vanguard Target Retirement Income Fund, Malvern, PA (6.43%); Vanguard Inflation-Protected Securities Fund—Institutional Shares: National Financial Services Corporation, New York, NY (7.79%); Vanguard Inflation-Protected Securities Fund—Admiral Shares: National Financial Services Corporation, New York, NY (10.81%), Charles Schwab & Company, Inc., San Francisco, CA (9.90%).

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, 2011 , the name and percentage ownership of each DTC participant that owned of record 5% or more of the outstanding ETF Shares of a Fund were as follows:

Vanguard Total Bond Market Index Fund—ETF Shares: Charles Schwab & Company, Inc. (14.05%), State Street Bank and Trust Company (10.49%), National Financial Services LLC (9.72%), Citigroup Global Markets Inc. (7.58%), Edward D. Jones & Company (7.33%), Pershing LLC (5.93%); Vanguard Short-Term Bond Index Fund—ETF Shares: Charles Schwab & Company, Inc. (16.62%), Merrill Lynch, Pierce Fenner & Smith (15.06%), National Financial Services LLC (7.93%), Wells Fargo Bank, National Association (6.58%); Vanguard Intermediate-Term Bond Index Fund—ETF Shares: Merrill Lynch, Pierce Fenner & Smith (19.34%), Charles Schwab & Company, Inc. (11.11%), Wells Fargo Bank, National Association (8.05%), National Financial Services LLC (6.45%), Morgan Stanley DW Inc. (6.33%), TD Ameritrade Clearing, Inc. (6.10%); Vanguard Long-Term Bond Index Fund—ETF Shares: National Financial Services LLC (15.64%), Charles Schwab & Company, Inc. (12.09%), TD Ameritrade Clearing, Inc. (12.04%), Pershing LLC (8.92%), Merrill Lynch, Pierce Fenner & Smith (8.51%), Vanguard Marketing Corporation (5.14%).

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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 at 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 represents of the fund’s total assets as of the end of the most recent calendar quarter (quarter-end ten largest stock holdings) online at v anguard.com in the “Portfolio” section of the fund’s Portfolio & Management 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 end of the most recent month (month-end ten largest stock holdings) online at v anguard.com in the “Portfolio” section of the fund’s Portfolio & Management page, 10 business days after the end of the month. Together, the quarter-end and month-end ten largest stock holdings are referred to as the ten largest stock holdings. 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 and Vanguard Market Neutral Fund, generally will seek to disclose the fund’s complete portfolio holdings as of the end of the most recent calendar quarter online at v anguard.com in the “Portfolio” section of the fund’s Portfolio & Management page, 30 calendar days after the end of the calendar quarter. Vanguard Market Neutral Fund generally will seek to disclose the Fund’s complete portfolio holdings as of the end of the most recent calendar quarter online at v anguard.com in the “Portfolio” section of the Fund’s Portfolio & Management page, 60 calendar days after the end of the calendar quarter. In accordance with Rule 2a-7 under the 1940 Act, each of the Vanguard money market funds will disclose the fund’s complete portfolio holdings as of the last business day of the prior month online at vanguard.com, in the “Portfolio” section of the fund’s Portfolio & Management page, no later than the fifth (5th) business day of the current month. The complete portfolio holdings information for money market funds will remain available online for at least six (6) months after the initial posting. Online disclosure of complete portfolio holdings is made to all categories of persons, including individual investors, institutional

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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 previously described and, except with respect to the complete portfolio holdings of the Vanguard money market funds, may withhold any portion of the fund’s complete portfolio holdings from online disclosure as previously described when deemed to be in the best interests of the fund after consultation with a Vanguard fund’s investment advisor.

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 previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives.

Currently, 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., Bloomberg L.P., Brilliant Graphics, Inc., Broadridge Financial Solutions, Inc., Brown Brothers Harriman & Co., FactSet Research Systems Inc., Innovation Printing & Communications, Intelligencer Printing Company, Investment Technology Group, Inc., Lipper, Inc., Markit WSO Corporation, McMunn Associates Inc., Oce’ Business Services, Inc., 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

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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.

Currently, 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 each fund’s 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 Nonmaterial 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 end of the most recent calendar quarter (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. Approved Vanguard Representatives may at their 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.

Currently, Vanguard nonmaterial 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 that may overlap with the actual or expected portfolio holdings of the Vanguard fund s t hat offer a class of shares known as Vanguard ETF Shares (ETF

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Funds), in accordance with the terms and conditions of related exemptive orders (Vanguard ETF Exemptive Orders) issued by the Securities and Exchange Commissio n, as described in this section.

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 the investor must purchase or redeem 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 listing 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 the DTC.) In addition, the listing 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 on 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 v anguard.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 at 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, at 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

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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 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 v anguard.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, at 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 by an experienced investment advisory staff employed directly by Vanguard. The compensation and other expenses of the advisory staff are allocated among the funds utilizing these services.

During th e f iscal years ended December 31, 2008, 2009, and 2010, the Funds paid the following approximate amounts of Vanguard’s expenses relating to investment advisory services:

Fund   2008   2009   2010
Vanguard Total Bond Market Index Fund $ 5,777,000 $ 5,291,000 $ 5,502,000
Vanguard Total Bond Market II Index Fu nd 1     1,220,000   2,116,000
Vanguard Short-Term Bond Index Fund   727,000   1,089,000   1,369,000
Vanguard Intermediate-Term Bond Index Fund   746,000   820,000   799,000
Vanguard Long-Term Bond Index Fund   265,000   257,000   237,000
Vanguard Inflation-Protected Securities Fund   1,476,000   2,682,000   3,742,000
1 Vanguard Total Bond Market II Index Fund did not commence operations until January 26, 2009.        

 

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Other Accounts Managed

Joshua Barrickman manages the Intermediate-Term Bond Index Fund and the Total Bond Market II Index Fund ; as of December 31, 2010 , the Funds collectively held assets of $ 50.2 billion. As of December 31, 2010 , Mr. Barrickman also managed three other registered investment companies with total assets of $ 1.5 billion (none of which had advisory fees based on performance) .

Gregory Davis manages the Short-Term Bond Index Fund; as of December 31, 2010 , the Fund held assets of $ 20.1 billion. Mr. Davis co-manages the Total Bond Market Index and Long-Term Bond Index Funds; as of December 31, 2010 , the Funds collectively held assets of $ 90.1 billion. As of December 31, 2010 , Mr. Davis also managed all or a portion of two other registered investment companies with total assets of $ 10.6 billion, co-managed four other registered investment companies with total assets of $ 389 million, and co-managed 12 other pooled investment vehicles with total assets of $ 8.1 billion (none of which had advisory fees based on performance).

John W. Hollyer co-manages the Inflation-Protected Securities Fund; as of December 31, 2010 , the Fund held assets of $ 32.1 billion.

Gerald Hwang co-manages the Long-Term Bond Index Fund; as of December 31, 2010 , the Fund held assets of $ 3.8 billion. As of December 31, 2010 , Mr. Hwang also co-managed three other registered investment companies with total assets of $ 348 million and managed one other pooled investment vehicle with total assets of $4.0 billion (advisory fees not based on account performance).

Kenneth E. Volpert co-manages the Total Bond Market Index and Inflation-Protected Securities Funds; as of December 31, 2010 , the Funds collectively held assets of $ 118.4 billion. As of December 31, 2010, Mr. Volpert also co-managed one other registered investment company with total assets of $ 2.1 billion and 12 other pooled investment vehicles with total assets of $ 8.1 billion (none of which had advisory fees based on performance).

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 funds and 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

The Funds’ portfolio manager s are Vanguard employee s . This section describes the compensation of Vanguard employees who manage Vanguard mutual funds. As of December 31, 2010 , 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.

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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 . F or 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 F und over a three-year period. For the Total Bond Market, Total Bond Market II, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond Index Funds, the performance factor depends on how closely the portfolio manager tracks the F und’s target inde x o ver a one-year period . A dditional factors include the portfolio manager’s contributions to the investment management functions within the sub-asset class, contributions to the development of other 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, 2010 , Vanguard employees collectively invested more than $2.7 billion in Vanguard funds. F. William McNabb III, Chairman of the Board, Chief Executive Officer, and President of Vanguard and the Vanguard funds , and George U. Sauter, Chief Investment Officer and Managing Director of Vanguard, invest substantially all of their personal financial assets in Vanguard funds.

As of December 31, 2010 , Mr. Volpert owned shares of the Total Bond Market Index Fund within the $10,001–$50,000 range and Mr. Hollyer owned shares of the Inflation-Protected Securities Fund within the $500,001–$1,000,000 range. Except as noted in the previous sentence, as of December 31, 2010 , the portfolio managers did not own any shares of the Bond Index Funds they managed.

Duration and Termination of Investment Advisory Agreement

Vanguard provides at-cost investment advisory services to the Funds pursuant to the terms of the Fifth Amended and Restated Funds’ Service Agreement. This agreement will continue in full force and effect until terminated or amended by mutual agreement of the Vanguard 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

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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 the Fund.

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).

As previously explained, the types of securities that the Fund purchases do not normally involve the payment of explicit brokerage commissions. If any such brokerage commissions are paid, however, the advisor will evaluate their reasonableness by considering: (1) historical commission rates; (2) rates which other institutional investors are paying, based upon publicly available information; (3) rates quoted by brokers and dealers; (4) the size of a particular transaction, in terms of the number of shares, dollar amount, and number of clients involved; (5) the complexity of a particular transaction in terms of both execution and settlement; (6) the level and type of business done with a particular firm over a period of time; and (7) the extent to which the broker or dealer has capital at risk in the transaction.

During the fiscal years ended December 31, 2008 , 2009 , and 2010 , 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 December 31, 2008, 2009, and 2010, the Inflation-Protected Securities Fund paid $904,000, $700,000, and $944,000, respectively, in brokerage commissions .

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.

As of December 31, 2010 , 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 $ 634,641,000
  Credit Suisse Securities (USA) LLC   438,968,000
  Deutsche Bank Securities Inc.   119,500,000
  Goldman, Sachs & Co.   486,070,000
  Morgan Stanley   730,802,000
  Nomura Securities International Inc.   17,095,000
  UBS Securities LLC   378,350,000
 
Vanguard Total Bond Market II Index F und Banc of America Securities LLC   252,129,000
  Credit Suisse Securities (USA) LLC   438,968,000
  Deutsche Bank Securities Inc.   88,371,000
  Goldman, Sachs & Co.   195,671,000
  Morgan Stanley   342,802,000
  Nomura Securities International Inc.   6,638,000
  UBS Securities LLC   148,927,000

 

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Fund Regular Broker or Dealer (or Parent) Aggregate Holdings
Vanguard Short-Term Bond Index Fund BNP Paribas Securities Corp.
  Citigroup Global Markets Inc. 274,380,000
  Credit Suisse Securities (USA) LLC 81,605,000
  Deutsche Bank Securities Inc. 59,372,000
  Goldman, Sachs & Co. 175,667,000
  HSBC Securities (USA) Inc. 57,451,000
  Morgan Stanley 158,964,000
 
Vanguard Intermediate-Term Bond Index Fund Citigroup Global Markets Inc. 82,152,000
  Credit Suisse Securities (USA) LLC 49,145,000
  Deutsche Bank Securities Inc. 16,954,000
  Goldman, Sachs & Co. 114,409,000
  HSBC Securities (USA) Inc. 19,004,000
  Morgan Stanley 109,948,000
 
Vanguard Long-Term Bond Index Fund Citigroup Global Markets Inc. 29,061,000
  Credit Suisse Securities (USA) LLC 3,071,000
  Goldman, Sachs & Co. 32,096,000
  Morgan Stanley 5,124,000
 
Vanguard Inflation-Protected Securities Fund

 

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 procedures and guidelines to the extent that they call for Vanguard to administer the voting process and implement the resulting voting decisions, and for these purposes the guidelines 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. Although 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 some or all of its shares if doing so would be in the fund’s and its shareholders’ best interests. These circumstances may arise, for example, if the expected cost of voting exceeds the expected benefits of voting , if exercising the vote would result in the imposition of trading or other restrictions , or if a fund (or all Vanguard-advised funds in the aggregate) were to own more than a maximum percentage of a company’s stock (as determined by the company’s governing documents) .

In evaluating proxy proposals, we consider information from many sources, including but not limited to the investment advisor for the fund, the 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

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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.

Although 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 majority of Nominated slate results in board made up of a majority of
independent directors. non-independent directors.
All members of Audit, Nominating, and Compensation Audit, Nominating, and/or Compensation committees include
committees are independent of management. non-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. Contested director elections  

 

In the case of contested board elections, we will evaluate the nominees’ qualifications, the performance of the incumbent board, and 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.

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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 Total potential dilution (including all stock-based plans) exceeds 15% of
of company stock (frequently expressed as a multiple of salary). shares outstanding.
Company requires stock acquired through option exercise to be Annual option grants have exceeded 2% of shares outstanding.
held for a certain period of time.  
Compensation program includes performance-vesting awards, Plan permits repricing or replacement of options without
indexed 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 Plan contains automatic share replenishment (evergreen) feature.
cash in delivering market-competitive total pay.  

 

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.

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)

Although 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.

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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 for renewal. Renewal of plan is automatic or does not require shareholder approval.
Plan incorporates review by a committee of independent Ownership trigger is less than 15%.
directors at least every three years (so-called TIDE provisions).  
Plan includes permitted-bid/qualified-offer feature (chewable Classified board.
pill) that mandates a 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.

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.

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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 in which the issues presented are unlikely to have a material impact on shareholder value.

VII. Voting Shares of a Company that has an Ownership Limitation

Certain companies have provisions in their governing documents that restrict stock ownership in excess of a specified limit. The ownership limit may be applied at the individual fund level or across all Vanguard-advised funds. Typically, these ownership restrictions are included in the governing documents of real estate investment trusts, but may be included in other companies’ governing documents.

A company’s governing documents normally allow the company to grant a waiver of these ownership limits, which would allow a fund (or all Vanguard-advised funds) to exceed the stated ownership limit. Sometimes a company will grant a waiver without restriction. From time to time, a company may grant a waiver only if a fund (or funds) agrees to not vote the company’s shares in excess of the normal specified limit. In such a circumstance, a fund may refrain from voting shares if owning the shares beyond the company’s specified limit is in the best interests of the fund and its shareholders.

VIII. 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.

IX. 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. Although 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 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, at 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.

X. 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

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might have a conflict of interest regarding a proxy vote, that member must recuse himself 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, at 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 v anguard.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 v anguard.com , or the SEC’s website at s ec.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 (E TF Fund s) 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 transact through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (DTC) and has executed a Participant Agreement with Vanguard Marketing Corporation, the Funds’ Distributor (the Distributor). For a current list of Authorized Participants, contact the Distributor.

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.

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). A s 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 on the following pages. Each ETF Fund reserves the right to issue Creation Units for cash, rather than in kind.

Exchange Listing and Trading

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 (NAV) . 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 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.

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 transactions among them through electronic book-entry changes in their accounts, 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. The DTC is a subsidiary of the Depository Trust and Clearing Corporation (DTCC), which is owned by certain participants of the DTCC’s subsidiaries, including the DTC. Access to the DTC system is also available

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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 each ETF Fund, upon request and for a fee, a listing of the ETF Shares of the Fund held by each DTC Participant. The Fund shall obtain from each DTC Participant the number of Beneficial Owners holding ETF Shares, directly or indirectly, through the DTC Participant. The Fund shall provide each DTC Participant with copies of such notice, statement, or other communication, in form, number, and at such place as the DTC Participant may reasonably request, in order that these communications may be transmitted by the DTC Participant, directly or indirectly, to the Beneficial Owners. In addition, the Fund shall pay to each DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to this transmittal, 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 immediately credit the 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 Fund 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 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 Fund and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Fund shall take action either to find a replacement for the DTC to perform its functions at a comparable cost or, if such replacement is unavailable, to issue and deliver printed certificates representing ownership of ETF Shares, unless the Fund 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 NAV 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 .

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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 of cash equal to the difference between the NAV of a Creation Unit and the market value of the Deposit Securities (Deposit Amount). It ensures that the NAV of a Fund Deposit (not including the Tr ansaction F ee) 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).

Vanguard, through the National Securities Clearing Corporation (NSCC), makes available after the close of each Business Day, a list of the names and the 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 to respond to adjustments to the weighting or composition of the component securities of the relevant target index.

Vanguard 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. Vanguard 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 Fund reserves the right to permit or require the substitution of an amount of cash—referred to as “cash-in-lieu”—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. Trading costs incurred by the Fund in connection with the purchase of Deposit Securities with cash-in lieu amounts will be an expense of the Fund. However, Vanguard may adjust the Transaction Fee to protect existing shareholders from this expense.

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.

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 and such order must be received by the Distributor prior to the closing time of the regular session of the NYSE (Closing Time), (ordinarily 4 p.m. , Eastern time) 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 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 in an acceptable form with an Authorized Participant. 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.

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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.

The ETF Fund may issue Creation Units before receiving some or all of the Deposit Securities in reliance on the Authorized Participant’s undertaking to deliver the missing Deposit Securities at a later date. Such undertaking shall be secured by the delivery and maintenance of cash collateral (Additional Cash Deposit) in an amount determined by the Fund in accordance with the terms of 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 and number of shares 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;
  • acceptance of the Deposit Securities would have certain adverse tax consequences to the ETF 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 ETF Fund or Vanguard, have an adverse effect on the Fund or any of its shareholders; or
  • circumstances outside the control of the ETF Funds, the Trust, t he Transfer Agent, the Custodian, the Distributor, and Vanguard make it for all practical purposes impossible to process the order. Examples of such circumstances include natural disasters, public service disruptions, o r 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, the 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

Eac h E TF Fun d imposes a T ransaction F ee (payable to the Fund) to compensate the Fund for 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 Market ETF purchased with a Fund Deposit that includes cash in lieu 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 lieu of mortgage TBA securities, the Transaction Fee will not include a variable charge.

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T he Transaction Fees for purchases are listed in the table below. This table is subject to revision from time to time.

    Transaction Fee
Fund   on Purchases
  $ 500 1
Vanguard Total Bond Market ETF    
Vanguard Short-Term Bond ETF   500
Vanguard Intermediate-Term Bond ETF   500
Vanguard Long-Term Bond ETF   500
1 The maximum variable charge is 2.00% of the value of the TBA securities. On average, the
charge is expected to be 0.05%.    

 

When an ETF Fund permits (or requires) a purchaser to substitute cash in lieu of depositing one or more Deposit Securities, the purchaser will be assessed an additional charge on the cash-in-lieu portion of its investment. The amount of this charge will vary as determined by the Fund at its sole discretion, but will not be more than is reasonably needed to compensate the Fund for the transaction costs including, if applicable, the estimated market impact costs associated with purchasing the relevant Deposit Securities.

REDEMPTION OF ETF SHARES IN CREATION UNITS

To be eligible to place a redemption order, you must be an Authorized Participant. Investors that are not Authorized Participants must make appropriate arrangements with an Authorized Participant in order to redeem a Creation Unit.

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 received on a Business Day in good order will receive the NAV next determined after the request is made.

Unless cash redemptions are available or specified for a Fund, 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 in cash 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 in cash 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 may not 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.

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 previously discussed, 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.

When satisfying redemption requests, Vanguard 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 value of the mortgage TBA. Vanguard 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 TBA transactions, Treasury securities of equivalent value and duration, rather than cash.

Neither the Trust, the ETF Fund, the Distributor, nor any affiliated party will be liable to an investor who is unable to 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).

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Transaction Fees on Redemptions of Creation Units

Each E TF Fun d imposes a transaction fee (payable to the Fund) to compensate the Fund for the 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 ETF Funds impose an additional charge on investors who receive cash in lieu of one or more Redemption Securities.

T he Transaction Fees for redemptions are listed in the table below. This table is subject to revision from time to time.

    Transaction Fee
Fund   on Redemptions
Vanguard Total Bond Market ETF $ 500
Vanguard Short-Term Bond ETF   500
Vanguard Intermediate-Term Bond ETF   500
Vanguard Long-Term Bond ETF   500

 

Placement of Redemption Orders

To initiate a redemption order for a Creation Unit, an Authorized Participant must submit such 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 Fund , the Distributor, nor any affiliated party will be liable to an investor who is unable to 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 the settlement date (T+3 unless otherwise agreed) 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 in reliance on the Authorized Participant’s undertaking to deliver the missing ETF Shares at a later date. Such undertaking shall be secured by the Authorized Participant’s delivery and maintenance of cash collateral (Additional Cash Deposit) in an amount determined by the Fund in accordance with the terms of the Authorized Participant Agreement. In all cases the Fund shall be entitled to charge the redeeming investor for any costs (including investment losses, attorney’s fees, and interest) sustained by the Fund as a result of the late delivery or failure to deliver.

S uspension 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 permit s.

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.

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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, Vanguard ETFs do not intend to include 144A securities in their redemption baskets.)

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 funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions.

FINANCIAL STATEMENTS

Each Fund’s Financial Statements for the fiscal year ended December 31, 2010 , appearing in the Funds‘ 2010 Annual report to Shareholders, and the report thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference into 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.

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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.

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FTSE ® ” and “ FTSE4Good ™” are trademarks jointly owned by the London Stock Exchange plc and The Financial Times Limited and are used by FTSE International Limited under license. “ GEIS ” and “ All-World ” are trademarks of FTSE International Limited. The FTSE4Good US Select Index, FTSE Global Equity Index Series (GEIS), FTSE All-World ex US Index, FTSE All-World Index, FTSE High Dividend Yield Index, and FTSE Global Small Cap ex US Index are calculated by FTSE International Limited. FTSE International Limited does not sponsor, endorse, or promote the fund; is not in any way connected to it; and does not accept any liability in relation to its issue, operation, and trading. Russell is a trademark of The Frank Russell Company. Standard & Poor’s ® , S&P ® , S&P 500 ® , Standard & Poor’s 500 , and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in the funds. Vanguard ETFs are not sponsored, endorsed, sold, or promoted by Barclays Capital. Barclays Capital 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 Barclays Capital Index to track general bond market performance. Barclays Capital hereby expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect to the Barclays Capital Index and any data included therein. Barclays Capital’s only relationship to Vanguard and Vanguard ETFs is the licensing of the Barclays Capital Index which is determined, composed, and calculated by Barclays Capital without regard to Vanguard or the Vanguard ETFs. Barclays Capital 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. CFA ® and Chartered Financial Analyst ® are trademarks owned by CFA Institute.

SAI084 042011


 

PART C

VANGUARD BOND INDEX FUNDS
OTHER INFORMATION

Item 28. Exhibits

(a)       Articles of Incorporation, Amended and Restated Agreement and Declaration of Trust, filed on December 24, 2008, Post-Effective Amendment No. 49, is hereby incorporated by reference.
(b)       By-Laws, filed herewith .
(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 Contracts, 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 Part B of this Registration Statement.
(g)       Custodian Agreements, for JPMorgan Chase Bank, filed herewith .
(h)       Other Material Contracts, form of Authorized Participant Agreement, filed herewith . Fifth Amended and Restated Funds’ Service Agreement, filed herewith .
(i)       Legal Opinion, not applicable.
(j)       Other Opinions, Consent of an Independent Registered Public Accounting Firm, 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, filed herewith .
(o)       Reserved.
(p)       Code of Ethics, for The Vanguard Group, Inc., filed on February 25, 2010, Post-Effective Amendment No. 54, is hereby incorporated by reference.

Item 29. Persons Controlled by or under Common Control with Registrant

Registrant is not controlled by or under common control with any person.

Item 30. Indemnification

The Registrant’s organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacities . Article VII, Section 2 of the Amended and Restated Agreement and Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. However, this provision does not cover any liability to which a Trustee or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee’s or officer’s office with the Registrant.

C-2


 

Item 31. Business and Other Connections of Investment Adviser

The Vanguard Group, Inc. (“Vanguard”), is an investment adviser registered under the Advisers Act. The list required by this Item 31 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 32. Principal Underwriters

(a)       Vanguard Marketing Corporation, a wholly o wned 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 170 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
Mortimer J. Buckley Director and Senior Vice President None
F. William McNabb III Chairman Chairman and Chief Executive Officer
Michael S. Miller Director and Managing Director None
Glenn W. Reed 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 Principa l None
Salvatore L. Pantalone Financial and Operatons Principal and Assistant None
  Treasurer  
Michael L. Kimmel Secretary None
John C. Heywood Principal None
Jack T. Wagner Assistant Treasurer None
Jennifer M. Halliday Assistant Treasurer None
Deborah McCracken Assistant Secretary None
Joseph F. Miele Registered Municipal Securities Principal None
Scott M. Bishop Registered Municipal Securities Principal None
Bradley J. Sacco Registered Municipal Securities Principal None
Jane K. Myer Principal None
Pauline C. Scalvino Chief Compliance Officer Chief Compliance Officer
Matthew Woldin AIS Administrative Services Officer None
Paul Atkins Assistant Treasurer None
Timothy P. Holmes Principal None
Colin M. Kelton Principal None

 

C-3


 

(c) Not applicable.

Item 33. Location of Accounts and Records

The books, accounts, and other documents required by Section 31(a) of the Investment Company Act and the rules promulgated thereunder will be maintained at the offices of Registrant; Registrant’s Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrant’s Custodian, JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070

Item 34. 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 35. Undertakings

Not applicable.

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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 25t h day of April, 2011 .

VANGUARD BOND INDEX FUNDS

BY:______ /s/ F. William McNabb III* ____________

F. William McNabb III
Chief Executive Officer and President

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
 
/s/ F. William McNabb III* Chairman and Chief Executive April 25, 2011
  Officer  
F. William McNabb III    
/s/ Emerson U. Fullwood* Trustee April 25, 2011
Emerson U. Fullwood    
/s/ Rajiv L. Gupta* Trustee April 25, 2011
Rajiv L. Gupta    
/s/ Amy Gutmann* Trustee April 25, 2011
Amy Gutmann    
/s/ JoAnn Heffernan Heisen* Trustee April 25, 2011
JoAnn Heffernan Heisen    
/s/ F. Joseph Loughrey* Trustee April 25, 2011
F. Joseph Loughrey    
/s/ André F. Perold* Trustee April 25, 2011
André F. Perold    
/s/ Alfred M. Rankin, Jr.* Trustee April 25, 2011
Alfred M. Rankin, Jr.    
/s/ Peter F. Volanakis* Trustee April 25, 2011
Peter F. Volanakis    
/s/ Thomas J. Higgins* Chief Financial Officer April 25, 2011
Thomas J. Higgins    

 

*By: /s/ Heidi Stam

Heidi Stam, pursuant to a Power of Attorney filed on April 26, 2010, see File Number 33-53683, Incorporated by Reference.

C-5


 

INDEX TO EXHIBITS  
By-Laws Ex-99.B
Custodian Agreements, for JPMorgan Chase Bank Ex-99.G
Other Material Contracts, form of Authorized Participant Agreement. Ex-99.H
Other Material Contracts, Fifth Amended and Restated Funds’ Service Agreement Ex-99.H
Other Opinions, Consent of an Independent Registered Public Accounting Firm. Ex-99.J
Rule 18f-3 Plan. Ex-99.N

 

C-6


 

 

AMENDED AND RESTATED

 

BY-LAWS

 

OF

 

VANGUARD BOND INDEX FUNDS

 

These By-Laws of Vanguard Bond Index Funds, a Delaware statutory trust, are subject to the Amended and Restated Declaration of Trust of the Trust dated as of November 19, 2008, as from time to time amended, supplemented or restated (the “Declaration of Trust”).  In the event of any conflict between the provisions of these By-Laws and the provisions of the Declaration of Trust, the provisions of the Declaration of Trust will control.  Capitalized terms used herein which are defined in the Declaration of Trust are used as therein defined.

 

ARTICLE I

 

Fiscal Year and Offices

 

Section 1.  Fiscal Year.   Unless otherwise provided by resolution of the Board of Trustees, the fiscal year of the Trust shall begin on the 1st day of January and end on the last day of December.

 

Section 2.   Delaware Office .  The Board of Trustees shall establish a registered office in the State of Delaware and shall appoint as the Trust’s registered agent for service of process in the State of Delaware an individual resident of the State of Delaware or a Delaware corporation or a foreign corporation authorized to transact business in the State of Delaware; in each case the business office of such registered agent for service of process shall be identical with the registered Delaware office of the Trust.

 

Section 3.  Principal Office.   The principal office of the Trust shall be located at 100 Vanguard Boulevard, Malvern, Pennsylvania 19355, or such other location s the Trustees may from time to time determine.

 

Section 4.  Other Offices.   The Board of Trustees may at any time establish branch or subordinate offices at any place or places where the Trust intends to do business.

 

 

108019, 3     8/11/2010


 

 

ARTICLE II

 

Meetings of Shareholders

 

Section 1.  Place of Meeting.   Meetings of the Shareholders for the election of Trustees shall be held in such place as shall be fixed by resolution of the Board of Trustees and stated in the notice of the meeting.

 

Section 2.  Annual Meetings.   An annual meeting of Shareholders will not be held unless the 1940 Act requires the election of Trustees to be acted upon.

 

Section 3.  Special Meetings.   Special meetings of the Shareholders may be called at any time by the chairman, or president, or by the Board of Trustees, and shall be called by the secretary upon written request of the holders of Shares entitled to cast not less than twenty percent of all the votes entitled to be cast at such meeting provided that (a) such request shall state the purposes of such meeting and the matters proposed to be acted on, (b) the Shareholders requesting such meeting shall have paid to the Trust the reasonable estimated cost of preparing and mailing the notice thereof, which the secretary shall determine and specify to such Shareholders, and (c) the Shareholders requesting such meeting must provide ninety (90) days advance notice of business to be brought to a vote at a shareholder meeting and for nomination of directors, unless such notice runs counter to the proxy rules under the Securities Exchange Act of 1934.  No special meeting need be called upon the request of Shareholders entitled to cast less than a majority of all votes entitled to be cast at such meeting to consider any matter which is substantially the same as a matter voted on at any meeting of the Shareholders held during the preceding twelve months.  The foregoing provisions of this Section 3 notwithstanding a special meeting of Shareholders shall be called upon the request of the holders of at least ten percent of the votes entitled to be cast for the purpose of consideration removal of a Trustee from office as provided in section 16(c) of the 1940 Act.

 

Section 4.  Notice.   Not less than ten, nor more than ninety (90) days before the date of every annual or special meeting, the secretary shall cause to be delivered to each Shareholder entitled to vote at such meeting a written notice in accordance with Article IV, Section 1 of these By-Laws stating the time and place of the meeting and, in the case of a special meeting of Shareholders, shall state the purposes of the meeting and the matters to be acted on and the purposes of such special meeting and matters to be acted on shall be limited to those stated in such written notice.  Notice of adjournment of a Shareholders meeting to another time or place need not be given, if such time and place are announced at the meeting. No notice need be given to any Shareholder who shall have failed to inform the Trust of his or her current address or if a written waiver of notice, executed before or after the meeting by the Shareholder or his or her attorney thereunto authorized, is filed with the records of the meeting.

 

Section 5.  Record Date for Meetings.   The Board of Trustees may fix in advance a date not more than ninety (90), nor less than ten, days prior to the date of any annual or special meeting of the Shareholders as a record date for the determination of the Shareholders entitled to receive notice of, and to vote at any meeting and any adjournment thereof; and in such case such Shareholders and only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to receive notice of and to vote at such meeting and any adjournment thereof as the case may be, notwithstanding any transfer of any stock on the books of the Trust after any such record date fixed as aforesaid.

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Section 6.  Quorum. Except as otherwise provided by the 1940 Act or in the Trust’s Declaration of Trust, at any meeting of Shareholders, the presence in person or by proxy of the holders of record of Shares issued and outstanding and entitled to vote representing more than thirty-three and one-third percent (33 1/3%) of the total combined net asset value of all Shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any business at the meeting.

 

If, however, a quorum shall not be present or represented at any meeting of the Shareholders, either the chairman of the meeting (without a Shareholder vote) or the holders of a majority of the votes present or in person or by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented to a date not more than 120 days after the original record date.  At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified.

 

Section 7.  Voting. Each Shareholder shall have one vote for each dollar (and a fractional vote for each fractional dollar) of the net asset value of each share (including fractional Shares) held by such Shareholder on the record date set pursuant to Section 5 on each matter submitted to a vote at a meeting of Shareholders.  For purposes of this section and Section 6 of this Article II, net asset value shall be determined pursuant to Section 3, Article VIII of these By-Laws as of the record date for such meeting set pursuant to Section 5.  There shall be no cumulative voting in the election of Trustees.  At any meeting of Shareholders, any Shareholder entitled to vote thereat may vote either in person or by written proxy signed by the Shareholder, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the secretary, or with such other officer or agent of the Trust as the secretary may direct, for verification prior to the time at which such vote shall be taken; provided, however, that notwithstanding any other provision of this Section 7 to the contrary, the Trustees or any officer of the Trust with responsibility for such matters may at any time adopt one or more electronic, telecommunication, telephonic, computerized or other alternatives to execution of a written instrument that will enable Shareholders entitled to vote at any meeting to appoint a proxy to vote such Shareholders’ Shares at such meeting; provided, further, that, until the Trustees or such officer adopt such electronic, telecommunication, telephonic, computerized or other alternatives, no Shareholder may act to appoint a proxy to vote such holder’s Shares at a meeting by any such alternatives and if the Trustees or such officer do adopt such electronic, telecommunication, telephonic, computerized or other alternatives, then Shareholders may only act in the manner prescribed by the Trustees.  Proxies may be solicited in the name of one or more Trustees or one or more of the officers of the Trust.  Only Shareholders of record shall be entitled to vote.  When any share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such share.  Unless otherwise specifically limited by their terms, proxies shall entitle the holder thereof to vote at any adjournment of a meeting.  A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the holder of any such share is a minor or a person of unsound mind, and subject to guardianship or the legal control of any other person as regards the charge or management of such share, he or she may vote by his or her guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. Except as otherwise provided herein or in the Declaration of Trust or the Delaware Act, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Shareholders were Shareholders of a Delaware corporation.

3


 

 

 

At all meetings of the Shareholders, a quorum being present, the Trustees shall be elected by the vote of a plurality of the votes cast by Shareholders present in person or by proxy and all other matters shall be decided by majority of the votes cast by Shareholders present in person or by proxy, unless the question is one for which by express provision of the 1940 Act or the Declaration of Trust, a different vote is required, in which case such express provision shall control the decision of such question. There shall be no cumulative voting for Trustees.  At all meetings of Shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the Chairman of the meeting.

 

Section 8.  Inspectors.   At any election of Trustees, the Board of Trustees prior thereto may, or, if they have not so acted, the chairman of the meeting may appoint one or more inspectors of election who shall first subscribe an oath of affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall after the election make a certificate of the result of the vote taken.

 

Section 9.  Stock Ledger and List of Shareholders.   It shall be the duty of the secretary or assistant secretary of the Trust to cause an original or duplicate share ledger to be maintained at the office of the Trust’s transfer agent.  Such share ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection.

 

Section 10.  Action Without Meeting.   Any action to be taken by Shareholders may be taken without a meeting if (a) all Shareholders entitled to vote on the matter consent to the action in writing, (b) all Shareholders entitled to notice of the meeting but not entitled to vote at it sign a written waiver of any right to dissent, and (c) the written consents are filed with the records of the meeting of Shareholders.  Such consent shall be treated for all purposes as a vote at a meeting.

4


 

 

5


 

 

ARTICLE III

 

Trustees

 

Section 1.    Place of Meeting.   Meetings of the Board of Trustees, regular or special, may be held at any place as the Board may from time to time determine.

 

Section 2.  Quorum.   At all meetings of the Board of Trustees, one-third of the Trustees then in office shall constitute a quorum for the transaction of business provided that in no case may a quorum be fewer than two persons (unless there is only one Trustee then in office, in which case such Trustee shall constitute a quorum).  The action of a majority of the Trustees present at any meeting at which a quorum is present shall be the action of the Board of Trustees unless the concurrence of a greater proportion is required for such action by the 1940 Act or the Declaration of Trust.  If a quorum shall not be present at any meeting of Trustees, the Trustees present thereat may by a majority vote adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present.

 

Section 3.  Regular Meetings.   Regular meetings of the Board of Trustees may be held without additional notice at such time and place as shall from time to time be determined by the Board of Trustees provided that notice of any change in the time or place of such meetings shall be sent promptly to each Trustee not present at the meeting at which such change was made in the manner provided for notice of special meetings.

 

Section 4.  Special Meetings.   Special meetings of the Board of Trustees may be called by the chairman or president on one day’s notice to each Trustee; special meetings shall be called by the chairman or president or secretary in like manner and on like notice on the written request of two Trustees.

 

Section 5.  Telephone Meeting.   Members of the Board of Trustees or a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time.

 

Section 6.  Informal Actions.   Any action required or permitted to be taken at any meeting of the Board of Trustees or of any committee thereof may be taken without a meeting, if a written consent to such action is signed by a majority of the Trustees then in office or by a majority of the members of such committee, as the case may be (unless, in either case, the question is one for which by express provision of the 1940 Act or the Declaration of Trust, a different vote is required, in which case such express provision shall control the decision of such question).  Any such written consent shall be filed with the minutes of proceedings of the Board or committee, as applicable.

 

Section 7.  Committees.   The Board of Trustees may appoint from among its members an Executive Committee and other committees composed of two or more Trustees, and may delegate to such committees any or all of the powers of the Board of Trustees in the management of the business and affairs of the Trust.

6


 

 

 

Section 8.  Action of Committees.   In the absence of an appropriate resolution of the Board of Trustees, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that the quorum shall not be fewer than two Trustees.  The committees shall keep minutes of their proceedings and shall report the same to the Board of Trustees at the meeting next succeeding, and any action by the committee shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration.  In the absence of any member of such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Trustees to act in the place of such absent member.

 

Section 9.  Election of Chairman.  The Board of Trustees shall choose a Chairman.  The Chairman of the Board of Trustees shall hold his post for such term and shall perform and execute such duties and administrative powers as the Board of Trustees shall prescribe from time to time.

 

Section 10.  Other Executive Posts.   The Board of Trustees from time to time may appoint such other Executive Posts as it shall deem advisable, who shall hold their posts for such terms and shall perform and execute such executive duties and administrative powers as the Board of Trustees shall from time to time prescribe.

 

 

ARTICLE IV

 

Notices

 

Section 1.  Form.   Subject to the 1940 Act, notices and all other communications to Shareholders shall be in writing and delivered personally, or sent by electronic transmission to an electronic mail address provided by the Shareholder or mailed to the Shareholders at their addresses appearing on the books of the Trust.  Notices to Trustees shall be oral or by telephone or in writing delivered personally or mailed to the Trustees at their addresses appearing on the books of the Trust or by electronic transmission to an electronic mail address provided by the Trustee.  Notice by mail shall be deemed to be given at the time when the same shall be mailed and notice by electronic transmission shall be deemed given at the time when sent.  Subject to the provisions of the 1940 Act, notice to Trustees need not state the purpose of a regular or special meeting.

 

Section 2.  Waiver.   Whenever any notice of the time, place or purpose of any meeting of Shareholders, Trustees or a committee is required to be given under the provisions of the Declaration of Trust or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting of Shareholders in person or by proxy, or at the meeting of Trustees or a committee in person, shall be deemed equivalent to the giving of such notice to such persons.

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ARTICLE V

 

Officers

 

Section 1.  Executive Officers.   The officers of the Trust shall be chosen by the Board of Trustees and shall include a president, a secretary and a treasurer.  The Board of Trustees may, from time to time, elect or appoint a controller, one or more vice presidents, assistant secretaries, assistant treasurers, and assistant controllers.  The same person may hold two or more offices, except that no person shall be both president and vice president and no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, the Declaration of Trust or these By-Laws to be executed, acknowledged or verified by two or more officers.

 

Section 2.  Election.   The Board of Trustees shall choose a president, a secretary and a treasurer.

 

Section 3.  Other Officers.   The Board of Trustees from time to time may appoint such other officers and agents as it shall deem advisable, who shall hold their offices for such terms and shall exercise powers and perform such duties as shall be determined from time to time by the Board of Trustees.  The Board of Trustees from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties.

 

Section 4.  Compensation.   The salaries or other compensation of all officers and agents of the Trust shall be fixed by the Board of Trustees, except that the Board of Trustees may delegate to any person or group of persons the power to fix the salary or other compensation of any subordinate officers or agents appointed pursuant to Section 3 of this Article V.

 

Section 5.  Tenure.   The officers of the Trust shall serve at the pleasure of the Board of Trustees.  Any officer or agent may be removed by the affirmative vote of the Board of Trustees with or without cause whenever, in its judgment, the best interests of the Trust will be served thereby.  In addition, any officer or agent appointed pursuant to Section 3 may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Board of Trustees.  Any vacancy occurring in any office of the Trust by death, resignation, removal or otherwise shall be filled by the Board of Trustees, unless pursuant to Section 3 the power of appointment has been conferred by the Board of Trustees on any other officer.

 

Section 6.  President and Chief Executive Officer.   The president shall be the chief executive officer of the Trust, unless the Board of Trustees designates the chairman as chief executive officer.  The chief executive officer shall see that all orders and resolutions of the Board of Trustees are carried into effect.  The chief executive officer shall also be the chief administrative officer of the Trust and shall perform such other duties and have such other powers as the Board of Trustees may from time to time prescribe.

8


 

 

 

Section 7.  Vice President.   The vice presidents, in order of their seniority, shall, in the absence or disability of the chief executive officer, perform the duties and exercise the powers of the chief executive officer and shall perform such other duties as the Board of Trustees or the chief executive officer may from time to time prescribe.

                       

Section 8.  Secretary.   The secretary shall attend all meetings of the Board of Trustees and all meetings of the Shareholders and record all the proceedings thereof and shall perform like duties for any committee when required.  He shall give, or cause to be given, notice of meetings of the Shareholders and of the Board of Trustees, shall have charge of the records of the Trust, including the stock books, and shall perform such other duties as may be prescribed by the Board of Trustees or chief executive officer, under whose supervision he shall be.  He shall keep in safe custody the seal of the Trust and, when authorized by the Board of Trustees, shall affix and attest the same to any instrument requiring it.  The Board of Trustees may give general authority to any other officer to affix the seal of the Trust and to attest the affixing by his signature.

 

Section 9.  Assistant Secretaries.   The assistant secretaries in order of their seniority, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties as the Board of Trustees or the chief executive officer shall prescribe.

 

Section 10.  Treasurer.   The treasurer, unless another officer has been so designated, shall be the chief financial officer of the Trust.  He shall have general charge of the finances and books of account of the Trust.  Except as otherwise provided by the Board of Trustees, he shall have general supervision of the funds and property of the Trust and of the performance by the custodian of its duties with respect thereto. He shall render to the Board of Trustees, whenever directed by the Board of Trustees, an account of the financial condition of the Trust and of all his transactions as treasurer.  He shall cause to be prepared annually a full and correct statement of the affairs of the Trust, including a balance sheet and a statement of operations for the preceding fiscal year.  He shall perform all of the acts incidental to the office of treasurer, subject to the control of the Board of Trustees or the chief executive officer.

 

Section 11.  Assistant Treasurer.   The assistant treasurer shall in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties as the Board of Trustees or the chief executive officer may from time to time prescribe.

 

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ARTICLE VI

 

Indemnification and Insurance

 

Section 1.  Agents, Proceedings and Expenses.   For the purpose of this Article, “agent” means any person who is or was a Trustee or officer of this Trust and any person who, while a Trustee or officer of this Trust, is or was serving at the request of this Trust as a Trustee, director, officer, partner, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise;  “Trust” includes any domestic or foreign predecessor entity of this Trust in a merger, consolidation, or other transaction in which the predecessor’s existence ceased upon consummation of the transaction;  “proceeding” means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative; and “expenses” includes without limitation attorney’s fees and any expenses of establishing a right to indemnification under this Article.

 

Section 2.  Actions Other Than by Trust.   This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Trust) by reason of the fact that such person is or was an agent of this Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed:  (a) in the case of conduct in his official capacity as an agent of the Trust, that his conduct was in the Trust’s best interests and (b) in all other cases, that his conduct was at least not opposed to the Trust’s best interests and (c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful.  The termination of any proceeding by judgment, order or settlement shall not of itself create a presumption that the person did not meet the requisite standard of conduct set forth in this Section.  The termination of any proceeding by conviction, or a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the person did not meet the requisite standard of conduct set forth in this Section.

 

Section 3.  Actions by the Trust.   This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding by or in the right of this Trust to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Trust, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Trust and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

 

Section 4.  Exclusion of Indemnification.   Notwith­standing any provision to the contrary contained herein, there shall be no right to indemnification for 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 agent’s office with this Trust.

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No indemnification shall be made under Sections 2 or 3 of this Article:

 

                        (a)        In respect of any proceeding as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person’s official capacity; or

 

                        (b)        In respect of any proceeding as to which that person shall have been adjudged to be liable in the performance of that person’s duty to this Trust, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the relevant circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; however, in such case, indemnification with respect to any proceeding by or in the right of the Trust or in which liability shall have been adjudged by reason of the disabling conduct set forth in the preceding paragraph shall be limited to expenses; or

                                   

                        (c)        Of amounts paid in settling or otherwise disposing of a proceeding, with or without court approval, or of expenses incurred in defending a proceeding which is settled or otherwise disposed of without court approval, unless the required approval set forth in Section 6 of this Article is obtained.

 

Section 5.  Successful Defense by Agent.   To the extent that an agent of this Trust has been successful, on the merits or otherwise, in the defense of any proceeding referred to in Sections 2 or 3 of this Article before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Board of Trustees, including a majority who are disinterested, non-party Trustees, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article.

 

Section 6.  Required Approval.   Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Trust only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by:

 

                        (a)        A majority vote of a quorum consisting of Trustees who are not parties to the proceeding and are not interested persons of the Trust (as defined in the 1940 Act);

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                        (b)        A written opinion by an independent legal counsel; or

 

                        (c)        The Shareholders; however, Shares held by agents who are parties to the proceeding may not be voted on the subject matter under this Sub-Section.

 

Section 7.  Advance of Expenses.   Expenses incurred in defending any proceeding may be advanced by this Trust before the final disposition of the proceeding if (a) receipt of a written affirmation by the agent of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article and a written undertaking by or on behalf of the agent, such undertaking being an unlimited general obligation to repay the amount of the advance if it is ultimately determined that he has not met those requirements, and (b) a determination that the facts then known to those making the determination would not preclude indemnification under this Article.  Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible.

 

Section 8.  Other Contractual Rights.   Nothing contained in this Article shall affect any right to indemnification to which persons other than Trustees and officers of this Trust or any subsidiary hereof may be entitled by contract or otherwise.

 

Section 9.  Limitations.   No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears:

 

                        (a)        That it would be inconsistent with a provision of the Agreement and Declaration of Trust of the Trust, a resolution of the Shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or

 

                        (b)        That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.

 

Section 10.  Insurance.   Upon and in the event of a determination by the Board of Trustees of this Trust to purchase such insurance, this Trust shall purchase and maintain insurance on behalf of any agent or employee of this Trust against any liability asserted against or incurred by the agent or employee in such capacity or arising out of the agent’s or employee’s status as such to the fullest extent permitted by law.

 

Section 11.  Fiduciaries of Employee Benefit Plan.   This Article does not apply to any proceeding against any Trustee, investment manager or other fiduciary of an employee benefit plan in that person’s capacity as such, even though that person may also be an agent of this Trust as defined in Section 1 of this Article.  Nothing contained in this Article shall limit any right to indemnification to which such a Trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article.

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ARTICLE VII

 

Shares of Beneficial Interest

 

Section 1.  Certificates.   A certificate or certificates representing and certifying the series or class and the full, but not fractional, number of Shares of beneficial interest owned by each Shareholder in the Trust shall not be issued except as the Board of Trustees may otherwise determine from time to time. Any such certificate issued shall be signed by facsimile signature or otherwise by the chairman or president or a vice president and counter-signed by the secretary or an assistant secretary or the treasurer or an assistant treasurer.

 

Section 2.  Signature.   In case any officer who has signed any certificate ceases to be an officer of the Trust before the certificate is issued, the certificate may nevertheless be issued by the Trust with the same effect as if the officer had not ceased to be such officer as of the date of its issue.

 

Section 3.  Recording and Transfer Without Certificates.   The Trust shall have the full power to participate in any program approved by the Board of Trustees providing for the recording and transfer of ownership of the Trust’s Shares by electronic or other means without the issuance of certificates.

 

Section 4.  Lost Certificates.   The Board of Trustees may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Trust alleged to have been stolen, lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to have been stolen, lost or destroyed, or upon other satisfactory evidence of such theft, loss or destruction and may in its discretion and as a condition precedent to the issuance thereof, require the owner of such stolen, lost or destroyed certificate or certificates, or his legal representative, to give the Trust a bond with sufficient surety, to the Trust to indemnify it against any loss or claim that may be made by reason of the issuance of a new certificate.

 

Section 5.  Transfer of Shares.   Transfers of Shares of beneficial interest of the Trust shall be made on the books of the Trust by the holder of record thereof (in person or by his attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the secretary of the Trust) (i) if a certificate or certificates have been issued, upon the surrender of the certificate or certificates, properly endorsed or accompanied by proper instruments of transfer, representing such Shares, or (ii) as otherwise prescribed by the Board of Trustees.  Every certificate exchanged, surrendered for redemption or otherwise returned to the Trust shall be marked “Canceled” with the date of cancellation.

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Section 6.  Registered Shareholders.   The Trust shall be entitled to recognize the exclusive right of a person registered on its books as the owner of Shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of Shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or Shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law or the Declaration of Trust.

 

Section 7.  Transfer Agents and Registrars.   The Board of Trustees may, from time to time, appoint or remove transfer agents and or registrars of the Trust, and they may appoint the same person as both transfer agent and registrar.  Upon any such appointment being made, all certificates representing Shares of beneficial interest thereafter issued shall be countersigned by such transfer agent and shall not be valid unless so countersigned.

 

Section 8.  Stock Ledger.   The Trust shall maintain an original stock ledger containing the names and addresses of all Shareholders and the number and series or class of Shares held by each Shareholder.  Such stock ledger may be in written form or any other form capable of being converted into written form within reasonable time for visual inspection.

 

ARTICLE VIII

 

General Provisions

 

Section 1.  Custodianship.   Except as otherwise provided by resolution of the Board of Trustees, the Trust shall place and at all times maintain in the custody of a custodian (including any sub-custodian for the custodian) all funds, securities and similar investments owned by the Trust.  Subject to the approval of the Board of Trustees, the custodian may enter into arrangements with securities depositories, provided such arrangements comply with the provisions of the 1940 Act and the rules and regulations promulgated thereunder.

 

Section 2.  Execution of Instruments.   All deeds, documents, transfers, contracts, agreements and other instruments requiring execution by the Trust may be signed by the chairman or president or a vice president or the treasurer or the secretary or any other duly authorized officer or agent of the Trust, which authority may be general or specific.

 

Section 3.  Net Asset Value.   Subject to Section 1 of Article VI of the Declaration of Trust, the net asset value per Share shall be determined separately as to each series or class of the Trust’s Shares, by dividing the sum of the total market value of the series’ or class’s investments and other assets, less any liabilities, by the total outstanding Shares of such series or class, subject to the 1940 Act and any other applicable Federal securities law or rule or regulation currently in effect.

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ARTICLE IX

 

Amendments

 

The Board of Trustees, without a vote by the Shareholders, shall have the power to make, alter and repeal the By-Laws of the Trust.

 

 

 

 

 

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GLOBAL CUSTODY AGREEMENT

This Amended and Restated Agreement, dated June 25, 2001, is between THE CHASE MANHATTAN BANK ("Bank"), a New York banking corporation with a place of business at 4 MetroTech Center, Brooklyn, New York 11245; and each of the open-end management investment companies listed on Exhibit 1 of this Agreement, registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940, organized as Delaware business trusts (each a "Trust"), severally and for and on behalf of certain of their respective portfolios listed on Exhibit 1 (each a "Fund"), each Trust and their respective Funds with a place of business at P.O. Box 2600, Valley Forge, PA 19482. Each Trust for which Bank serves as custodian under this Agreement, shall individually be referred to as "Customer".

1. INTENTION OF THE PARTIES; DEFINITIONS

1.1 INTENTION OF THE PARTIES.

(a) This Agreement sets out the terms governing custodial, settlement and certain other associated services offered by Bank to Customer. Bank shall be responsible for the performance of only those duties that are set forth in this Agreement or expressly contained in Instructions that are consistent with the provisions of this Agreement and with Bank's operations and procedures. Customer acknowledges that Bank is not providing any legal, tax or investment advice in providing the services hereunder.

(b) Investing in foreign markets may be a risky enterprise. The holding of Global Assets and cash in foreign jurisdictions may involve risks of loss or other special features. Bank shall not be liable for any loss that results from the general risks of investing or Country Risk.

1.2 DEFINITIONS.

(a) As used herein, the following terms have the meaning hereinafter stated.

"ACCOUNT" has the meaning set forth in Section 2.1 of this Agreement.

"AFFILIATE" means an entity controlling, controlled by, or under common control with, Bank.

"AFFILIATED SUBCUSTODIAN" means a Subcustodian that is an Affiliate.

"APPLICABLE LAW" means any statute, whether national, state or local, applicable in the United States or any other country, the rules of the treaty establishing the European Community, other applicable treaties, any other law, rule, regulation or


interpretation of any governmental entity, any applicable common law, and any decree, injunction, judgment, order, ruling, or writ of any governmental entity.

"AUTHORIZED PERSON" means any person (including an investment manager or other agent) who has been designated by written notice from Customer or its designated agent to act on behalf of Customer hereunder. Such persons shall continue to be Authorized Persons until such time as Bank receives Instructions from Customer or its designated agent that any such person is no longer an Authorized Person.

"BANK INDEMNITEES" means Bank, its Subcustodians, and their respective nominees, directors, officers, employees and agents.

"BANK'S LONDON BRANCH" means the London branch office of The Chase Manhattan Bank.

"CASH ACCOUNT" has the meaning set forth in Section 2.1(a)(ii).

"CORPORATE ACTION" means any subscription right, bonus issue, stock repurchase plan, redemption, exchange, tender offer, or similar matter with respect to a Financial Asset in the Securities Account that requires discretionary action by the holder, but does not include proxy voting.

"COUNTRY RISK" means the risk of investing or holding assets in a particular country or market, including, but not limited to, risks arising from: nationalization, expropriation or other governmental actions; the country's financial infrastructure, including prevailing custody and settlement practices; laws applicable to the safekeeping and recovery of Financial Assets and cash held in custody; the regulation of the banking and securities industries, including changes in market rules; currency restrictions, devaluations or fluctuations; and market conditions affecting the orderly execution of securities transactions or the value of assets.

"CUSTOMER" means individually each Trust and their respective Funds as listed on Exhibit 1 hereto.

"ENTITLEMENT HOLDER" means the person named on the records of a Securities Intermediary as the person having a Securities Entitlement against the Securities Intermediary.

"FINANCIAL ASSET" means, as the context requires, either the asset itself or the means by which a person's claim to it is evidenced, including a Security, a security certificate, or a Securities Entitlement. "Financial Asset" includes any Global Assets but does not include cash.

"FUND" means each portfolio of each Trust and listed on Exhibit 1 hereto.

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"GLOBAL ASSET" means any "Financial Asset" (a) for which the principal trading market is located outside of the United States; (b) for which presentment for payment is to be made outside of the United States; or (c) which is acquired outside of the United States.

"INSTRUCTIONS" has the meaning set forth in Section 3.1 of this Agreement.

"LIABILITIES" means any liabilities, losses, claims, costs, damages, penalties, fines, obligations, or expenses of any kind whatsoever (including, without limitation, reasonable attorneys', accountants', consultants' or experts' fees and disbursements).

"SECURITIES" means stocks, bonds, rights, warrants and other negotiable and non-negotiable instruments, whether issued in certificated or uncertificated form, that are commonly traded or dealt in on securities exchanges or financial markets. "Securities" also means other obligations of an issuer, or shares, participations and interests in an issuer recognized in the country in which it is issued or dealt in as a medium for investment and any other property as may be acceptable to Bank for the Securities Account.

"SECURITIES ACCOUNT" means each Securities custody account on Bank's records to which Financial Assets are or may be credited pursuant hereto.

"SECURITIES DEPOSITORY" has the meaning set forth in Section 5.1 of this Agreement.

"SECURITIES ENTITLEMENT" means the rights and property interest of an Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of Article 8 of the Uniform Commercial Code of the State of New York, as the same may be amended from time to time.

"SECURITIES INTERMEDIARy" means Bank, a Subcustodian, a Securities Depository, and any other financial institution which in the ordinary course of business maintains custody accounts for others and acts in that capacity.

"SUBCUSTODIAN" has the meaning set forth in Section 5.1 and includes Affiliated Subcustodians.

"TRUST" means each open-end investment company organized as a Delaware business trust and listed on Exhibit 1 hereto.

(b) All terms in the singular shall have the same meaning in the plural unless the context otherwise provides and visa versa.

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2. WHAT BANK IS REQUIRED TO DO

2.1 Set Up Accounts.

(a) Bank shall establish and maintain the following accounts ("Accounts"):

(i) a Securities Account in the name of Customer on behalf of each Fund for Financial Assets, which may be received by Bank or its Subcustodian for the account of Customer, including as an Entitlement Holder; and

(ii) an account in the name of Customer ("Cash Account") for any and all cash in any currency received by Bank or its Subcustodian for the account of Customer.

Notwithstanding paragraph (ii), cash held in respect of those markets where Customer is required to have a cash account in its own name held directly with the relevant Subcustodian shall be held in that manner and shall not be part of the Cash Account. Bank shall notify Customer prior to the establishment of such an account.

(b) At the request of Customer, additional Accounts may be opened in the future, which shall be subject to the terms of this Agreement.

2.2 Cash Account.

Except as otherwise provided in Instructions acceptable to Bank, all cash held in the Cash Account shall be deposited during the period it is credited to the Account in one or more deposit accounts at Bank or at Bank's London Branch. Any cash so deposited with Bank's London Branch shall be payable exclusively by Bank's London Branch in the applicable currency, subject to compliance with any Applicable Law, including, without limitation, any restrictions on transactions in the applicable currency imposed by the country of the applicable currency.

2.3 Segregation of Assets; Nominee Name.

(a) Bank shall identify in its records that Financial Assets credited to Customer's Securities Account belong to Customer on behalf of the relevant Fund (except as otherwise may be agreed by Bank and Customer).

(b) To the extent permitted by Applicable Law or market practice, Bank shall require each Subcustodian to identify in its own records that Financial Assets credited to Customer's Securities Account belong to customers of Bank, such that it is readily apparent that the Financial Assets do not belong to Bank or the Subcustodian.

(c) Bank is authorized, in its discretion, to hold in bearer form, such Financial

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Assets as are customarily held in bearer form or are delivered to Bank or its Subcustodian in bearer form; and to register in the name of the Customer, Bank, a Subcustodian, a Securities Depository, or their respective nominees, such Financial Assets as are customarily held in registered form. Customer authorizes Bank or its Subcustodian to hold Financial Assets in omnibus accounts and shall accept delivery of Financial Assets of the same class and denomination as those deposited with Bank or its Subcustodian.

2.4 Settlement of Trades.

When Bank receives an Instruction directing settlement of a trade in Financial Assets that includes all information required by Bank, Bank shall use reasonable care to effect such settlement as instructed. Settlement of purchases and sales of Financial Assets shall be conducted in accordance with prevailing standards of the market in which the transaction occurs. The risk of loss shall be Customer's whenever Bank delivers Financial Assets or payment in accordance with applicable market practice in advance of receipt or settlement of the expected consideration. In the case of the failure of Customer's counterparty to deliver the expected consideration as agreed, Bank shall contact the counterparty to seek settlement and, if the settlement is not received, notify Customer, but Bank shall not be obligated to institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action.

2.5 Contractual Settlement Date Accounting.

(a) Bank shall effect book entries on a "contractual settlement date accounting" basis as described below with respect to the settlement of trades in those markets where Bank generally offers contractual settlement day accounting and shall notify Customer of these markets from time to time.

(i) Sales: On the settlement date for a sale, Bank shall credit the Cash Account with the sale proceeds of the sale and transfer the relevant Financial Assets to an account pending settlement of the trade if not already delivered.

(ii) Purchases: On the settlement date for the purchase (or earlier, if market practice requires delivery of the purchase price before the settlement date), Bank shall debit the Cash Account with the settlement monies and credit a separate account. Bank then shall post the Securities Account as awaiting receipt of the expected Financial Assets. Customer shall not be entitled to the delivery of Financial Assets that are awaiting receipt until Bank or a Subcustodian actually receives them.

Bank reserves the right to restrict in good faith the availability of contractual day settlement accounting for credit reasons. Bank, whenever reasonably possible, will notify Customer prior to imposing such restrictions.

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(b) Bank may (in its discretion) upon at least 48 hours prior oral or written notification to Customer, reverse any debit or credit made pursuant to
Section 2.5(a) prior to a transaction's actual settlement, and Customer shall be responsible for any costs or liabilities resulting from such reversal. Customer acknowledges that the procedures described in this sub-section are of an administrative nature, and Bank does not undertake to make loans and/or Financial Assets available to Customer.

2.6 Actual Settlement Date Accounting.

With respect to any sale or purchase transaction that is not posted to the Account on the contractual settlement date as referred to in Section 2.5, Bank shall post the transaction on the date on which the cash or Financial Assets received as consideration for the transaction is actually received by Bank.

2.7 Income Collection; Autocredit.

(a) Bank shall credit the Cash Account with income and redemption proceeds on Financial Assets in accordance with the times notified by Bank from time to time on or after the anticipated payment date, net of any taxes that are withheld by Bank or any third party. Where no time is specified for a particular market, income and redemption proceeds from Financial Assets shall be credited only after actual receipt and reconciliation. Bank may reverse such credits upon at least 48 hours prior oral or written notification to Customer when Bank believes that the corresponding payment shall not be received by Bank within a reasonable period or such credit was incorrect.

(b) Bank shall make reasonable endeavors in its discretion to contact appropriate parties to collect unpaid interest, dividends or redemption proceeds, but neither Bank nor its Subcustodians shall be obliged to file any formal notice of default, institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action.

2.8 Fractions/ Redemptions by Lot.

Bank may sell fractional interests in Financial Assets and credit the Cash Account with the proceeds of the sale. If some, but not all, of an outstanding class of Financial Asset is called for redemption, Bank may allot the amount redeemed among the respective beneficial holders of such class of Financial Asset in any manner Bank deems to be fair and equitable.

2.9 Presentation of Coupons; Certain Other Ministerial Acts.

Until Bank receives Instructions to the contrary, Bank shall:

(a) present all Financial Assets for which Bank has received notice of a call for redemption or that have otherwise matured, and all income and interest coupons and other income items that call for payment upon

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                    presentation;

               (b)  execute in the name of Customer such  certificates as may be
                    required to obtain  payment in respect of Financial  Assets;
                    and

               (c)  exchange interim or temporary documents of title held in the
                    Securities Account for definitive documents of
                           title.

2.10     Corporate Actions.
----     ------------------

     (a) Bank  shall  follow  Corporate  Actions  and advise  Customer  of those

Corporate Actions of which Bank's central corporate actions department receives notice from the issuer or from the Securities Depository in which such Financial Assets are maintained or notice published in publications and reported in reporting services routinely used by Bank for this purpose.

(b) If an Authorized Person fails to provide Bank with timely Instructions with respect to any Corporate Action, neither Bank nor its Subcustodians or their respective nominees shall take any action in relation to that Corporate Action, except as otherwise agreed in writing by Bank and Customer or as may be set forth by Bank as a default action in the advice it provides under Section
2.10 (a) with respect to that Corporate Action.

2.11     Proxy Voting.
----     -------------

     (a) Subject to and upon the terms of this  sub-section,  Bank shall provide

Customer with information which it receives on matters to be voted upon at meetings of holders of Financial Assets ("Notifications"), and Bank shall act in accordance with Customer's Instructions in relation to such Notifications ("the active proxy voting service").

(b) The following provisions relate to proxy voting services with respect to Global Assets:

(i) If information is received by Bank at its proxy voting department too late to permit timely voting by Customer, Bank's only obligation shall be to provide to Customer, so far as reasonably practicable, a Notification (or summary information concerning a Notification) on an "information only" basis.

(ii) The active proxy voting service is available only in certain markets, details of which are available from Bank on request. Provision of the active proxy voting service is conditional upon receipt by Bank of a duly completed enrollment form as well as additional documentation that may be required for certain markets.

(iii)Bank reserves the right to provide Notifications or parts thereof in the language received. Bank shall attempt in good faith to provide accurate and complete

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Notifications, whether or not translated.

(iv) Customer acknowledges that Notifications and other information furnished pursuant to the active proxy voting service ("information") are proprietary to Bank and that Bank owns all intellectual property rights, including copyrights and patents, embodied therein. Accordingly, Customer shall not make any use of such information except in connection with the active proxy voting service.

(v) In markets where the active proxy voting service is not available or where Bank has not received a duly completed enrollment form or other relevant documentation, Bank shall not provide Notifications to Customer but shall endeavor to act upon Instructions to vote on matters before meetings of holders of Financial Assets where it is reasonably practicable for Bank (or its Subcustodians or nominees as the case may be) to do so and where such Instructions are received in time for Bank to take timely action (the "passive proxy voting service").

(c) Bank shall act upon Instructions to vote on matters referred to in a Notification, provided Instructions are received by Bank at its proxy voting department by the deadline referred to in the relevant Notification. If Instructions are not received in a timely manner, Bank shall not be obligated to vote on the matter, but shall notify Customer accordingly.

(d) Customer acknowledges that the provision of proxy voting services (whether active or passive) may be precluded or restricted under a variety of circumstances. These circumstances include, but are not limited to: (i) the Financial Assets being on loan or out for registration, (ii) the pendency of conversion or another corporate action, or (iii) Financial Assets being held at Customer's request in a name not subject to the control of Bank or its Subcustodian, in a margin or collateral account at Bank or another bank or broker, or otherwise in a manner which affects voting, local market regulations or practices, or restrictions by the issuer. Additionally, in some cases Bank may be required to vote all shares held for a particular issue for all of Bank's customers in the same way. Where this is the case Bank, in the Notification, shall inform Customer.

(e) Notwithstanding the fact that Bank may act in a fiduciary capacity with respect to Customer under other agreements or otherwise hereunder, in performing active or passive voting proxy services Bank shall be acting solely as the agent of Customer, and shall not exercise any discretion with regard to such proxy services or vote any proxy except when directed by an Authorized Person.

2.12     Statements and Information Available On-Line.
----     ---------------------------------------------

     (a) Bank will  send,  or make  available  on-line,  to  Customer,  at times

mutually agreed, a statement of account in Bank's standard format for each Account maintained by Customer with Bank, identifying the Financial Assets and cash held in each Account. Bank also will provide to Customer, upon request, the capability to reformat the information contained in each statement of account. In addition, Bank will send, or make available on-line, to Customer an advice or notification of any transfers of cash or

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Financial Assets with respect to each Account. Bank will not be liable with respect to any matter set forth in those portions of any such statement of account or advice (or reasonably implied therefrom) to which Customer has not given Bank a written exception or objection within sixty (60) days of receipt of such statement, provided such matter is not the result of Bank's willful misconduct or bad faith.

(b) Prices and other information obtained from third parties which may be contained in any statement sent to Customer have been obtained from sources Bank believes to be reliable. Bank does not, however, make any representation as to the accuracy of such information or that the prices specified necessarily reflect the proceeds that would be received on a disposal of the relevant Financial Assets.

(c) Customer understands that records and reports, other than statements of account, that are available to it on-line on a real-time basis may not be accurate due to mis-postings, delays in updating Account records, and other causes. Bank will not be liable for any loss or damage arising out of the inaccuracy of any such records or reports that are accessed on-line on a real-time basis.

2.13     Access to Bank's Records.
----     -------------------------

     (a) Bank shall allow Customer and Customer's independent public accountants

such reasonable access to the records of Bank relating to Financial Assets as is required in connection with their examination of books and records pertaining to Customer's affairs. Subject to restrictions under Applicable Law, Bank also shall obtain an undertaking to permit Customer's independent public accountants reasonable access to the records of any Subcustodian of Securities held in the Securities Account as may be required in connection with such examination.

(b) Upon reasonable request of Customer, Bank shall provide Customer with a copy of Bank's report prepared in compliance with the requirements of Statement of Auditing Standards No. 70 issued by the American Institute of Certified Public Accountants, as it may be amended from time to time.

2.14     Maintenance of Financial Assets at Bank and at Subcustodian Locations.
----     ----------------------------------------------------------------------

     (a) Unless Instructions require another location acceptable to Bank, Global

Assets shall be held in the country or jurisdiction in which their principal trading market is located, where such Global Assets may be presented for payment, where such Financial Assets were acquired, or where such Financial Assets are held. Bank reserves the right to refuse to accept delivery of Global Assets or cash in countries and jurisdictions other than those referred to in Schedule 1 to this Agreement, as in effect from time to time.

(b) Bank shall not be obliged to follow an Instruction to hold Financial Assets with, or have them registered or recorded in the name of, any person not chosen by Bank.

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However, if Customer does instruct Bank to hold Securities with or register or record Securities in the name of a person not chosen by Bank, the consequences of doing so are at Customer's own risk and Bank shall not be liable therefor.

2.15     Tax Reclaims.
----     -------------

     Bank shall provide tax reclamation services as provided in Section 8.2.

2.16 Foreign Exchange Transactions.

To facilitate the administration of Customer's trading and investment activity, Bank may, but shall not be obliged to, enter into spot or forward foreign exchange contracts with Customer, or an Authorized Person, and may also provide foreign exchange contracts and facilities through its Affiliates or Subcustodians. Instructions, including standing instructions, may be issued with respect to such contracts, but Bank may establish rules or limitations concerning any foreign exchange facility made available. In all cases where Bank, its Affiliates or Subcustodians enter into a master foreign exchange contract that covers foreign exchange transactions for the Accounts, the terms and conditions of that foreign exchange contract and, to the extent not inconsistent, this Agreement, shall apply to such transactions.

3. INSTRUCTIONS

3.1 Acting on Instructions; Unclear Instructions.

(a) Bank is authorized to act under this Agreement (or to refrain from taking action) in accordance with the instructions received by Bank, via telephone, telex, facsimile transmission, or other teleprocess or electronic instruction or trade information system acceptable to Bank ("Instructions"). Bank shall have no responsibility for the authenticity or propriety of any Instructions that Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions that Bank may specify. Customer authorizes Bank to accept and act upon any Instructions received by it without inquiry. Customer shall indemnify the Bank Indemnitees against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against the Bank Indemnitees as a result of any action or omission taken in accordance with any Instructions or other directions upon which Bank is authorized to rely under the terms of this Agreement.

(b) Unless otherwise expressly provided, all Instructions shall continue in full force and effect until canceled or superseded.

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(c) Bank may (in its sole discretion and without affecting any part of this
Section 3.1) seek clarification or confirmation of an Instruction from an Authorized Person and may decline to act upon an Instruction if it does not receive clarification or confirmation satisfactory to it. Bank shall not be liable for any loss arising from any delay while it seeks such clarification or confirmation.

(d) In executing or paying a payment order Bank may rely upon the identifying number (e.g. Fedwire routing number or account) of any party as instructed in the payment order. Customer assumes full responsibility for any inconsistency within an Instruction between the name and identifying number of any party in payment orders issued to Bank in Customer's name.

3.2 Confirmation of Oral Instructions/ Security Devices.

Any Instructions delivered to Bank by telephone shall promptly thereafter be confirmed in writing by an Authorized Person. Each confirmation is to be clearly marked "Confirmation." Bank shall not be liable for having followed such Instructions notwithstanding the failure of an Authorized Person to send such confirmation in writing or the failure of such confirmation to conform to the telephone Instructions received. Bank shall notify Customer as soon as reasonably practicable if Bank does not receive a written confirmation or if such written confirmation fails to conform to the telephone Instructions received. Either party may record any of their telephonic communications. Customer shall comply with any security procedures reasonably required by Bank from time to time with respect to verification of Instructions. Customer shall be responsible for safeguarding any test keys, identification codes or other security devices that Bank shall make available to Customer or any Authorized Person.

3.3 Instructions; Contrary to Law/Market Practice.

Bank need not act upon Instructions which it reasonably believes to be contrary to law, regulation or market practice but shall be under no duty to investigate whether any Instructions comply with Applicable Law or market practice. Bank shall notify Customer as soon as reasonably practicable if it does not act upon Instructions under this Section.

3.4 Cut-off Times.

Bank has established cut-off times for receipt of some categories of Instruction, which shall be made available to Customer. If Bank receives an Instruction after its established cut-off time, it shall attempt to act upon the Instruction on the day requested if Bank deems it practicable to do so or otherwise as soon as practicable on the next business day.

4. FEES, EXPENSES AND OTHER AMOUNTS OWING TO BANK

4.1 Fees and Expenses.

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Customer shall pay Bank for its services hereunder the fees set forth in Schedule 2 hereto or such other amounts as may be agreed upon in writing from time to time.

4.2 Overdrafts.

If a debit to any currency in the Cash Account results in a debit balance in that currency then Bank may, in its discretion, advance an amount equal to the overdraft and such an advance shall be deemed a loan to Customer, payable on demand, bearing interest at the rate agreed by Customer and Bank for the Accounts from time to time, or, in the absence of such an agreement, at the rate charged by Bank from time to time, for overdrafts incurred by customers similar to Customer, from the date of such advance to the date of payment (both after as well as before judgment) and otherwise on the terms on which Bank makes similar advances available from time to time. Bank shall promptly notify Customer of such an advance. No prior action or course of dealing on Bank's part with respect to the settlement of transactions on Customer's behalf shall be asserted by Customer against Bank for Bank's refusal to make advances to the Cash Account or to settle any transaction for which Customer does not have sufficient available funds in the applicable currency in the Account.

4.3 Bank's Right Over Securities; Set-off.

(a) Customer grants Bank a security interest in and a lien on the Financial Assets held in the Securities Account of a particular Fund as shall have a fair market value equal to the aggregate amount of all overdrafts of such Fund, together with accrued interest, as security for any and all amounts which are now or become owing to Bank with respect to that Fund under any provision of this Agreement, whether or not matured or contingent ("Indebtedness"). Such lien and security interest shall be effective only so long as such advance, overdraft, or accrued interest thereon remains outstanding and Bank shall have all the rights and remedies of a secured party under the New York Uniform Commercial Code in respect of the repayment of the advance, overdraft or accrued interest.

(b) Bank shall be further entitled to set any such Indebtedness off against any cash or deposit account of a Fund with Bank or any of its Affiliates of which the Fund is the beneficial owner, regardless of the currency involved. Bank shall notify Customer in advance of any such charge.

5. SUBCUSTODIANS, SECURITIES DEPOSITORIES, AND OTHER AGENTS

5.1 Appointment of Subcustodians; Use of Securities Depositories.

(a) Bank is authorized under this Agreement to act through and hold Customer's Global Assets with subcustodians, being at the date of this Agreement the entities listed in Schedule 1 and/or such other entities as Bank may appoint as subcustodians ("Subcustodians"). Bank shall use reasonable care, prudence and diligence in the selection

12

and continued appointment of such Subcustodians. In addition, Bank and each Subcustodian may deposit Global Assets with, and hold Global Assets in, any securities depository, settlement system, dematerialized book entry system or similar system (together a "Securities Depository") on such terms as such systems customarily operate and Customer shall provide Bank with such documentation or acknowledgements that Bank may require to hold the Global Assets in such systems.

(b) Any agreement Bank enters into with a Subcustodian for holding Bank's customers' assets shall provide that: (i) such assets shall not be subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash deposits, except for liens or rights in favor of creditors of the Subcustodian arising under bankruptcy, insolvency or similar laws; (ii) beneficial ownership of such assets shall be freely transferable without the payment of money or value other than for safe custody or administration; (iii) adequate records will be maintained identifying the assets as belonging to Customer or as being held by a third party for the benefit of Customer; (iv) Customer and Customer's independent public accountants will be given reasonable access to those records or confirmation of the contents of those records; and (v) Customer will receive periodic reports with respect to the safekeeping of Customer's assets, including, but not limited to, notification of any transfer to or from Customer's account or a third party account containing assets held for the benefit of Customer. Where a Subcustodian deposits Securities with a Securities Depository, Bank shall cause the Subcustodian to identify on its records as belonging to Bank, as agent, the Securities shown on the Subcustodian's account at such Securities Depository. The foregoing shall not apply to the extent of any special agreement or arrangement made by Customer with any particular Subcustodian.

(c) Bank shall have no responsibility for any act or omission by (or the insolvency of) any Securities Depository. In the event Customer incurs a loss due to the negligence, bad faith, willful misconduct, or insolvency of a Securities Depository, Bank shall make reasonable endeavors to seek recovery from the Securities Depository.

5.2 Liability for Subcustodians.

(a) Subject to Section 7.1(b), Bank shall be liable for direct losses incurred by Customer that result from:

(i) the failure by the Subcustodian to use reasonable care in the provision of custodial services by it in accordance with the standards prevailing in the relevant market or from the fraud or willful default of such Subcustodian in the provision of custodial services by it; or

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(ii) the insolvency of any Affiliated Subcustodian.

(b) Subject to Section 7.1(b) and Bank's duty to use reasonable care, prudence and diligence in the monitoring of a Subcustodian's financial condition as reflected in its published financial statements and other publicly available financial information concerning it, Bank shall not be responsible for the insolvency of any Subcustodian which is not a branch or an Affiliated Subcustodian.

(c) Bank reserves the right to add, replace or remove Subcustodians. Bank shall give Customer prompt notice of any such action, which shall be advance notice if practicable. Upon request by Customer, Bank shall identify the name, address and principal place of business of any Subcustodian and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Subcustodian.

5.3 Use of Agents.

(a) Bank may provide certain services under this Agreement through third parties. These third parties may be Affiliates. Except to the extent provided in
Section 5.2 with respect to Subcustodians, Bank shall not be responsible for any loss as a result of a failure by any broker or any other third party that it selects and retains using reasonable care to provide ancillary services, such as pricing, proxy voting, and corporate action services, that it does not customarily provide itself. Nevertheless, Bank shall be liable for the performance of any such service provider selected by Bank that is an Affiliate to the same extent as Bank would have been liable if it performed such services itself.

(b) Bank shall execute transactions involving Financial Assets of United States origin through a broker which is an Affiliate (i) in the case of the sale under Section 2.8 of a fractional interest or (ii) if an Authorized Person directs Bank to use the affiliated broker or otherwise requests that Bank select a broker for that transaction, unless, in either case, the Affiliate does not execute similar transactions in such Financial Assets. The affiliated broker may charge its customary commission (or retain its customary spread) with respect to either such transaction.

6. ADDITIONAL PROVISIONS RELATING TO CUSTOMER

6.1 Representations of Customer and Bank.

(a) Customer represents and warrants to Bank that: (i) it has full authority and power, and has obtained all necessary authorizations and consents, to deposit and control the Financial Assets and cash in the Accounts, to use Bank as its custodian in accordance with the terms of this Agreement and to incur indebtedness, pledge Financial Assets as contemplated by Section 4.3, and enter into foreign exchange transactions; and (ii) this Agreement is its legal, valid and binding obligation, enforceable in accordance with its terms and it has full

14

power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement. Bank may rely upon the above or the certification of such other facts as may be required to administer Bank's obligations hereunder.

(b) Bank represents and warrants to Customer that this Agreement is its legal, valid and binding obligation, enforceable in accordance with its terms and it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement. Customer may rely upon the above or the certification of such other facts as may be required to administer Customer's obligations hereunder.

6.2 Customer to Provide Certain Information to Bank.

Upon request, Customer shall promptly provide to Bank such information about itself and its financial status as Bank may reasonably request, including Customer's organizational documents and its current audited and unaudited financial statements.

6.3 Customer is Liable to Bank Even if it is Acting for Another Person.

If Customer is acting as an agent for a disclosed or undisclosed principal in respect of any transaction, cash, or Financial Asset, Bank nevertheless shall treat Customer as its principal for all purposes under this Agreement. In this regard, Customer shall be liable to Bank as a principal in respect of any transactions relating to the Account. The foregoing shall not affect any rights Bank might have against Customer's principal.

6.4 Several Obligations of the Funds.

This Agreement is executed on behalf of the Board of Trustees of each Fund as Trustees and not individually and the obligations of this Agreement are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the Funds. With respect to the obligations of each Fund arising hereunder, Bank shall look for payment or satisfaction of any such obligation solely to the assets of the Fund to which such obligation relates as though Bank had separately contracted by separate written instrument with respect to each Fund.

7. WHEN BANK IS LIABLE TO CUSTOMER

7.1 Standard of Care; Liability.

(a) Bank shall use reasonable care in performing its obligations under this Agreement. Bank shall not be in violation of this Agreement with respect to any matter as to which it has satisfied its obligation of reasonable care.

(b) Bank shall be liable for Customer's direct damages to the extent they result from Bank's negligence, bad faith or willful misconduct in performing its duties as set out in

15

this Agreement and to the extent provided for in Section 5.2(a). Nevertheless, under no circumstances shall Bank be liable for any indirect, incidental, consequential or special damages (including, without limitation, lost profits) of any form incurred by any person, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, with respect to the Accounts or Bank's performance hereunder or its role as custodian.

(c) Customer shall indemnify the Bank Indemnitees against, and hold them harmless from, any Liabilities that may be imposed on, incurred by or asserted against any of the Bank Indemnitees in connection with or arising out of Bank's performance under this Agreement, provided the Bank Indemnitees have not acted with negligence or bad faith or engaged in fraud or willful misconduct in connection with the Liabilities in question. Nevertheless, Customer shall not be obligated to indemnify any Bank Indemnitee under the preceding sentence with respect to any Liability for which Bank is liable under Section 5.2 of this Agreement.

(d) Without limiting Subsections 7.1 (a), (b) or (c), Bank shall have no duty or responsibility to: (i) question Instructions or make any suggestions to Customer or an Authorized Person regarding such Instructions that Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions that Bank may specify; (ii) supervise or make recommendations with respect to investments or the retention of Financial Assets; (iii) advise Customer or an Authorized Person regarding any default in the payment of principal or income of any security other than as provided in Section 2.7(b) of this Agreement; (iv) evaluate or report to Customer or an Authorized Person regarding the financial condition of any broker, agent or other party to which Bank is instructed to deliver Financial Assets or cash; or (v) except for trades settled at DTC where the broker provides DTC trade confirmation and Customer provides for Bank to receive the trade instruction, review or reconcile trade confirmations received from brokers (and Customer or its Authorized Persons issuing Instructions shall bear any responsibility to review such confirmations against Instructions issued to and statements issued by Bank).

7.2 Force Majeure.

Bank shall maintain and update from time to time business continuation and disaster recovery procedures with respect to its global custody business that it determines from time to time meet reasonable commercial standards. Bank shall have no liability, however, for any damage, loss or expense of any nature that Customer may suffer or incur, caused by an act of God, fire, flood, civil or labor disturbance, war, act of any governmental authority or other act or threat of any authority (de jure or de facto), legal constraint, fraud or forgery (except by Bank or Bank Indemnitees), malfunction of equipment or software (except to the extent such malfunction is primarily attributable to Bank's negligence, or willful misconduct in maintaining the equipment or software), failure of or the effect of rules or operations of any external funds transfer system, inability to obtain or interruption of external communications facilities, or any cause beyond the reasonable control of Bank (including without limitation, the non-availability of appropriate foreign

16

exchange). Bank shall endeavor to promptly notify Customer when it becomes aware of any situation outlined above, but shall not be liable for failure to do so.

7.3 Bank May Consult With Counsel.

Bank shall be entitled to rely on, and may act upon the advice of professional advisers in relation to matters of law, regulation or market practice (which may be the professional advisers of Customer), and shall not be liable to Customer for any action reasonably taken or omitted pursuant to such advice.

7.4 Bank Provides Diverse Financial Services and May Generate Profits as

a Result.

Customer acknowledges that Bank or its Affiliates may have a material interest in transactions entered into by Customer with respect to the Account or that circumstances are such that Bank may have a potential conflict of duty or interest. For example, Bank or its Affiliates may act as a market maker in the Financial Assets to which Instructions relate, provide brokerage services to other customers, act as financial adviser to the issuer of such Financial Assets, act in the same transaction as agent for more than one customer, have a material interest in the issue of the Financial Assets, or earn profits from any of these activities. Customer acknowledges that Bank or its Affiliates may be in possession of information tending to show that the Instructions received may not be in the best interests of Customer. Bank is not under any duty to disclose any such information.

8. TAXATION

8.1 Tax Obligations.

(a) Customer confirms that Bank is authorized to deduct from any cash received or credited to the Cash Account any taxes or levies required by any revenue or governmental authority for whatever reason in respect of Customer's Accounts.

(b) If Bank does not receive appropriate declarations, documentation and information then additional United Kingdom taxation shall be deducted from all income received in respect of the Financial Assets issued outside the United Kingdom (which shall for this purpose include United Kingdom Eurobonds) and any applicable United States tax (including, but not limited to, non-resident alien tax) shall be deducted from United States source income. Customer shall provide to Bank such certifications, documentation, and information as it may require in connection with taxation, and warrants that, when given, this information is true and correct in every respect, not misleading in any way, and contains all material information. Customer undertakes to notify Bank immediately if any information requires updating or correcting.

(c) Customer shall be responsible for the payment of all taxes relating to the Financial Assets in the Securities Account, and Customer shall pay, indemnify and hold Bank

17

harmless from and against any and all liabilities, penalties, interest or additions to tax with respect to or resulting from, any delay in, or failure by, Bank (1) to pay, withhold or report any U.S. federal, state or local taxes or foreign taxes imposed on, or (2) to report interest, dividend or other income paid or credited to the Cash Account, whether such failure or delay by Bank to pay, withhold or report tax or income is the result of (x) Customer's failure to comply with the terms of this paragraph, or (y) Bank's own acts or omissions; provided however, Customer shall not be liable to Bank for any penalty or additions to tax due as a result of Bank's failure to pay or withhold tax or to report interest, dividend or other income paid or credited to the Cash Account solely as a result of Bank's negligent acts or omissions.

8.2 Tax Reclaims.

(a) Subject to the provisions of this Section, Bank shall apply for a reduction of withholding tax and any refund of any tax paid or tax credits in respect of income payments on Financial Assets credited to the Securities Account that Bank believes may be available.

(b) The provision of a tax reclamation service by Bank is conditional upon Bank receiving from Customer (i) a declaration of its identity and place of residence and (ii) certain other documentation (pro forma copies of which are available from Bank). If Financial Assets credited to the Account are beneficially owned by someone other than Customer, this information shall be necessary with respect to the beneficial owner. Customer acknowledges that Bank shall be unable to perform tax reclamation services unless it receives this information.

(c) Bank shall perform tax reclamation services only with respect to taxation levied by the revenue authorities of the countries advised to Customer from time to time and Bank may, by notification in writing, in its absolute discretion, supplement or amend the countries in which the tax reclamation services are offered. Other than as expressly provided in this Section 8.2 Bank shall have no responsibility with regard to Customer's tax position or status in any jurisdiction.

(d) Customer confirms that Bank is authorized to disclose any information requested by any revenue authority or any governmental body in relation to the processing of any tax reclaim.

9. TERMINATION

Either party may terminate this Agreement on sixty days' notice in writing to the other party. If Customer gives notice of termination, it must provide full details of the persons to whom Bank must deliver Financial Assets and cash. If Bank gives notice of termination, then Customer must, within sixty days following receipt of the notice, notify Bank of details of its new custodian, failing which Bank may elect (at any time after sixty days following Customer's receipt of the notice) either to retain the Financial Assets and cash until such details are given, continuing to charge fees due (in which case Bank's sole obligation shall be for the safekeeping of the Financial Assets and cash), or deliver the Financial Assets and cash to Customer. Bank shall in any event be entitled to deduct any uncontested amounts owing to it prior to delivery of the Financial Assets and cash (and, accordingly, Bank shall be

18

entitled to deduct cash from the Cash Account in satisfaction of uncontested amounts owing to it). Customer shall reimburse Bank promptly for all out-of-pocket expenses it incurs in delivering Financial Assets upon termination by Customer. Termination shall not affect any of the liabilities either party owes to the other arising under this Agreement prior to such termination.

10. MISCELLANEOUS

10.1     Notices.
----     --------

     Notices  (other than  Instructions)  shall be served by registered  mail or

hand delivery to the address of the respective parties as set out on the first page of this Agreement, unless notice of a new address is given to the other party in writing. Notice shall not be deemed to be given unless it has been received.

10.2     Successors and Assigns.
----     -----------------------

     This  Agreement  shall be binding on each of the  parties'  successors  and

assigns, but the parties agree that neither party can assign its rights and obligations under this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld.

10.3     Interpretation.
----     ---------------

     Headings  are  for  convenience   only  and  are  not  intended  to  affect

interpretation. References to sections are to sections of this Agreement and references to sub-sections and paragraphs are to sub-sections of the sections and paragraphs of the sub-sections in which they appear.

10.4 Entire Agreement.

(a) The following Rider(s) are incorporated into this Agreement:

___ Cash Trade Execution;

___ Accounting Services

_X_ Investment Company

_X_ Domestic and Global

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(b) This Agreement, including the Schedules, Exhibits, and Riders (and any separate agreement which Bank and Customer may enter into with respect to any Cash Account), sets out the entire Agreement between the parties in connection with the subject matter, and this Agreement supersedes any other agreement, statement, or representation relating to custody, whether oral or written. Amendments must be in writing and signed by both parties.

10.5     Information Concerning Deposits at Bank.
----     ----------------------------------------

     (a)  Bank's  London  Branch  is a  member  of the  United  Kingdom  Deposit

Protection Scheme (the "Scheme") established under Banking Act 1987 (as amended). The Scheme provides that in the event of Bank's insolvency payments may be made to certain customers of Bank's London Branch. Payments under the Scheme are limited to 90% of a depositor's total cash deposits subject to a maximum payment to any one depositor of (pound)18,000 (or 20,000 euros if greater). Most deposits denominated in sterling and other European Economic Area Currencies and euros made with Bank within the United Kingdom are covered. Further details of the Scheme are available on request.

(b) In the event that Bank incurs a loss attributable to Country Risk with respect to any cash balance it maintains on deposit at a Subcustodian or other correspondent bank in regard to its global custody or trust businesses in the country where the Subcustodian or other correspondent bank is located, Bank may set such loss off against Customer's Cash Account to the extent that such loss is directly attributable to Customer's investments in that market.

10.6     Confidentiality.
----     ----------------

     The parties hereto agree that each shall treat confidentially the terms and

conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party shall be used by the other party solely for the purpose of rendering or obtaining services pursuant to this Agreement, and except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available other than through a breach of this provision, or that is required to be disclosed by or to any regulatory authority, any external or internal accountant, auditor or counsels of the parties, by judicial or administrative process or otherwise by applicable law, or to any disclosure made by a party if such party's counsel has advised that such party could be liable under any applicable law or any judicial or administrative order or process for failure to make such disclosure.

10.7     Insurance.
----     ----------

         Bank shall not be required to maintain any insurance coverage for the

benefit of Customer.

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10.8 Governing Law and Jurisdiction. Certification of Residency.

This Agreement shall be construed, regulated, and administered under the laws of the United States or State of New York, as applicable, without regard to New York's principles regarding conflict of laws. The United States District Court for the Southern District of New York shall have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County shall have sole and exclusive jurisdiction. Either of these courts shall have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by applicable law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby. Customer certifies that it is a resident of the United States and shall notify Bank of any changes in residency. Bank may rely upon this certification or the certification of such other facts as may be required to administer Bank's obligations hereunder. Customer shall indemnify Bank against all losses, liability, claims or demands arising directly or indirectly from any such certifications.

10.9     Severability and Waiver.
----     ------------------------

     (a) If one or more  provisions of this Agreement are held invalid,  illegal

or unenforceable in any respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions shall not in any way be affected or impaired.

(b) Except as otherwise provided herein, no failure or delay on the part of either party in exercising any power or right hereunder operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision of this Agreement, or waiver of any breach or default, is effective unless in writing and signed by the party against whom the waiver is to be enforced.

[Section 10.10 follows on next page]

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10.10    Counterparts.
-----    -------------

     This Agreement may be executed in several counterparts, each of which shall

be deemed to be an original and together shall constitute one and the same agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

Each of the open-end investment companies listed on Exhibit 1 (each a "Trust")

By: /s/ Robert D. Snowden
Title:  Assistant Treasurer
Date:   June 25, 2001

THE CHASE MANHATTAN BANK

By: /s/ James E. Cecere, Jr.
Title:  Vice President
Date:   June 28, 2001

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EXHIBIT 1

EACH VANGUARD REGISTERED INVESTMENT COMPANY (AND THEIR FUNDS) THAT IS ENTERING INTO THE AMENDED AND RESTATED GLOBAL CUSTODY AGREEMENT WITH THE CHASE MANHATTAN BANK AND DATED AS OF JUNE 25, 2001

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Growth Index Fund
Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Specialized Funds
Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

23

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard World Funds
Vanguard International Growth Fund

24

Investment Company Rider to Amended and Restated Global Custody Agreement Between The Chase Manhattan Bank and Certain Open-End Management Investment Companies Listed on Exhibit 1 of the Agreement

The following modifications are made to the Agreement. To the extent there are any inconsistencies between the terms in this Investment Company Rider and the terms in the Agreement, the terms in this Investment Company Rider shall govern.

A. Add a new Section 2.17 to the Agreement as follows:

"2.17. Compliance with Securities and Exchange Commission ("SEC") rule 17f-5 ("rule 17f-5").

(a) Customer's board of directors (or equivalent body) (hereinafter `Board') hereby delegates to Bank, and, except as to the country or countries as to which Bank may, from time to time, advise Customer that it does not accept such delegation, Bank hereby accepts the delegation to it, of the obligation to perform as Customer's `Foreign Custody Manager' (as that term is defined in rule 17f-5(a)(3) as promulgated under the Investment Company Act of 1940, as amended ("1940 Act")), including for the purposes of: (i) selecting Eligible Foreign Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as the same may be amended from time to time, or that have otherwise been exempted pursuant to an SEC exemptive order) to hold foreign Financial Assets and cash, (ii) evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2)), (iii) monitoring such foreign custody arrangements (as set forth in rule 17f-5(c)(3)).

(b) In connection with the foregoing, Bank shall:

(i) provide written reports notifying Customer's Board of the placement of Financial Assets and cash with particular Eligible Foreign Custodians and of any material change in the arrangements with such Eligible Foreign Custodians, with such reports to be provided to Customer's Board at such times as the Board deems reasonable and appropriate based on the circumstances of Customer's foreign custody arrangements (and until further notice from Customer such reports shall be provided not less than annually with respect to the placement of Financial Assets and cash with particular Eligible Foreign Custodians and with reasonable promptness upon the occurrence of any material change in the arrangements with such Eligible Foreign Custodians);

(ii) exercise such reasonable care, prudence and diligence in performing as Customer's Foreign Custody Manager as a person having responsibility for the safekeeping of foreign Financial Assets and cash would exercise;


(iii)in selecting an Eligible Foreign Custodian, first have determined that foreign Financial Assets and cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such foreign Financial Assets and cash, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv);

(iv) determine that the written contract with an Eligible Foreign Custodian requires that the Eligible Foreign Custodian shall provide reasonable care for foreign Financial Assets and cash based on the standards applicable to custodians in the relevant market, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv).

(v) have established a system to monitor the continued appropriateness of maintaining foreign Financial Assets and cash with particular Eligible Foreign Custodians and of the governing contractual arrangements; it being understood, however, that in the event that Bank shall have determined that the existing Eligible Foreign Custodian in a given country would no longer afford foreign Financial Assets and cash reasonable care and that no other Eligible Foreign Custodian in that country would afford reasonable care, Bank shall promptly so advise Customer and shall then act in accordance with the Instructions of Customer with respect to the disposition of the affected foreign Financial Assets and cash.

(c) Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain foreign Financial Assets and cash on behalf of Customer with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Bank. Each such contract shall, except as set forth in the last paragraph of this subsection (c), include provisions that provide:

(i) For indemnification or insurance arrangements (or any combination of the foregoing) that will adequately protect Customer against the risk of loss of Financial Assets and cash held in accordance with such contract;

(ii) That Customer's Financial Assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash, liens or rights in favor of creditors of such Eligible Foreign Custodian arising under bankruptcy, insolvency or similar laws;

(iii)That beneficial ownership of Customer's Assets will be freely transferable without the payment of money or value other than for safe custody or administration;

2

(iv) That adequate records will be maintained identifying Customer's Assets as belonging to Customer or as being held by a third party for the benefit of Customer;

(v) That Customer's independent public accountants will be given access to those records described in (iv) above or confirmation of the contents of those records; and

(vi) That Customer will receive sufficient and timely periodic reports with respect to the safekeeping of Customer's Assets, including, but not limited to, notification of any transfer to or from Customer's account or a third party account containing Assets held for the benefit of Customer.

Such contract may contain, in lieu of any or all of the provisions specified in this subsection (c), such other provisions that Bank determines will provide, in their entirety, the same or a greater level of care and protection for Customer's Assets as the specified provisions, in their entirety.

(d) Except as expressly provided herein, Customer shall be solely responsible to assure that the maintenance of foreign Financial Assets and cash hereunder complies with the rules, regulations, interpretations and exemptive orders as promulgated by or under the authority of the SEC.

(e) Bank represents to Customer that it is a U.S. Bank as defined in Rule 17f-5(a)(7). Customer represents to Bank that: (1) the foreign Financial Assets and cash being placed and maintained in Bank's custody are subject to the 1940 Act, as the same may be amended from time to time; (2) its Board has determined that it is reasonable to rely on Bank to perform as Customer's Foreign Custody Manager; and (3) its Board or its investment adviser shall have determined that Customer may maintain foreign Financial Assets and cash in each country in which Customer's Financial Assets and cash shall be held hereunder and determined to accept Country Risk. Nothing contained herein shall require Bank to make any selection or to engage in any monitoring on behalf of Customer that would entail consideration of Country Risk.

(f) Bank shall provide to Customer such information relating to Country Risk as is specified in Appendix 1 hereto. Customer hereby acknowledges that:
(i) such information is solely designed to inform Customer of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (ii) Bank has gathered the information from sources it considers reliable, but that Bank shall have no responsibility for inaccuracies or incomplete information, provided that Bank transmits the information using reasonable care.

B. Add a new Section 2.18 to the Agreement as follows:

3

2.18. Compliance with SEC rule 17f-7 ("rule 17f-7").

(a) Bank shall, for consideration by Customer, provide an analysis of the custody risks associated with maintaining Customer's Financial Assets with each Eligible Securities Depository used by Bank as of the date hereof (or, in the case of an Eligible Securities Depository not used by Bank as of the date hereof, prior to the initial placement of Customer's Financial Assets at such Depository) and at which any Financial Assets of Customer are held or are expected to be held. The foregoing analysis will be provided to Customer at Bank's Website. In connection with the foregoing, Customer shall notify Bank of any Eligible Securities Depositories at which it does not choose to have its Financial Assets held. Bank shall monitor the custody risks associated with maintaining Customer's Financial Assets at each such Eligible Securities Depository on a continuing basis and shall promptly notify Customer or its investment adviser of any material changes in such risks.

(b) Bank shall exercise reasonable care, prudence and diligence in performing the requirements set forth in Section 2.18(a) above.

(c) Based on the information available to it in the exercise of diligence, Bank shall determine the eligibility under rule 17f-7 of each depository before including it on Schedule 3 hereto and shall promptly advise Customer if any Eligible Securities Depository ceases to be eligible. (Eligible Securities Depositories used by Bank as of the date hereof are set forth in Schedule 3 hereto, and as the same may be amended on notice to Customer from time to time.)

C. Add the following after the first sentence of Section 5.1(a) of the Agreement: "At the request of Customer, Bank may, but need not, add to Schedule 1 an Eligible Foreign Custodian where Bank has not acted as Foreign Custody Manager with respect to the selection thereof. Bank shall notify Customer in the event that it elects to add any such entity."

D. Add the following language as Sections 5.1(d) and (e) of the Agreement:

(d) The term Subcustodian as used herein shall mean the following:

(i) a `U.S. Bank,' which shall mean a U.S. bank as defined in SEC rule 17f-5(a)(7);

(ii) an `Eligible Foreign Custodian,' which shall mean: (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country's government or an agency thereof, and (ii) a majority-owned direct or indirect subsidiary of a U.S. Bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States. In addition, an Eligible Foreign Custodian shall also mean any other entity that

4

shall have been so qualified by exemptive order, rule or other appropriate action of the SEC.

(iii)For purposes of clarity, it is agreed that as used in
Section 5.2(a), the term Subcustodian shall not include any Eligible Foreign Custodian as to which Bank has not acted as Foreign Custody Manager.

(e) The term `securities depository' as used herein when referring to a securities depository located outside the U.S. shall mean:

an "Eligible Securities Depository" which, in turn, shall have the same meaning as in rule 17f-7(b)(1)(i)-(vi) as the same may be amended from time to time, or that has otherwise been made exempt pursuant to an SEC exemptive order; provided that, prior to the compliance date with rule 17f-7 for a particular securities depository the term "securities depository" shall be as defined in (a)(1)(ii)-(iii) of the 1997 amendments to rule 17f-5.

(f) The term "securities depository" as used herein when referring to a securities depository located in the U.S. shall mean a "securities depository" as defined in SEC rule 17f-4(a).

5

Appendix 1

Information Regarding Country Risk

1. To aid Customer in its determinations regarding Country Risk, Bank shall furnish annually and upon the initial placing of Financial Assets and cash into a country the following information (check items applicable):

         A        Opinions of local counsel concerning:

___               i. Whether applicable foreign law would restrict the access
                  afforded Customer's independent public accountants to books
                  and records kept by an eligible foreign custodian located in
                  that country.

___      ii.      Whether  applicable foreign law would restrict the Customer's
                  ability to recover its Financial Assets and cash in the
                  event of the bankruptcy of an Eligible Foreign Custodian
                  located in that country.

___               iii. Whether applicable foreign law would restrict the
                  Customer's ability to recover Financial Assets that are lost
                  while under the control of an Eligible Foreign Custodian
                  located in the country.

         B.       Written information concerning:

___      i.       The foreseeability of expropriation, nationalization, freezes,
                  or confiscation of Customer's Financial Assets.

___      ii.      Whether difficulties in converting Customer's cash and cash
                  equivalents to U.S. dollars are reasonably foreseeable.

C. A market report with respect to the following topics:

(i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, and (vi) depositories (including depository evaluation), if any.

2. To aid Customer in monitoring Country Risk, Bank shall furnish Customer the following additional information:

Market flashes, including with respect to changes in the information in market reports.


DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER

Corporate Actions and Proxies through The Depository Trust Company ("DTC")

With respect to Financial Assets held at DTC, the following provisions shall apply rather than the pertinent provisions of Sections 2.10-2.11 of the Agreement:

Bank shall send to Customer or the Authorized Person for a Securities Account, such proxies (signed in blank, if issued in the name of Bank's nominee or the nominee of a central depository) and communications with respect to Financial Assets in the Securities Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by Bank for forwarding to its customers. In addition, Bank shall follow coupon payments, redemptions, exchanges or similar matters with respect to Financial Assets in the Securities Account and advise Customer or the Authorized Person for such Account of rights issued, tender offers or any other discretionary rights with respect to such Financial Assets, in each case, of which Bank has received notice from the issuer of the Financial Assets, or as to which notice is published in publications routinely utilized by Bank for this purpose.


Correspondent banks are listed for information only. April 11, 2001

SUB-CUSTODIAN EMPLOYED BY

THE CHASE MANHATTAN BANK, GLOBAL CUSTODY

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


ARGENTINA       The Chase Manhattan Bank         Banco Generale de Negocios
                Arenales 707, 5th Floor          Buenos Aires
                1061 Buenos Aires
                ARGENTINA

                Citibank, N.A.                   Banco Generale de Negocios
                Bartolome Mitre 530              Buenos Aires
                1036 Buenos Aires
                ARGENTINA


AUSTRALIA       The Chase Manhattan Bank         Australia and New Zealand
                Level 37                         Banking Group Ltd.
                AAP Center                       Melbourne
                259, George Street
                Sydney NSW 2000
                AUSTRALIA


AUSTRIA         Bank Austria AG                  Chase Manhattan Bank AG
                Julius Tandler Platz - 3         Frankfurt
                A-1090 Vienna
                AUSTRIA


BAHRAIN         HSBC Bank Middle East            National Bank of Bahrain
                PO Box 57                        Manama
                Manama, 304
                BAHRAIN


BANGLADESH      Standard Chartered Bank          Standard Chartered Bank
                18-20 Motijheel C.A.             Dhaka
                Box 536,
                Dhaka-1000
                BANGLADESH


BELGIUM         Fortis Bank N.V.                 Chase Manhattan Bank AG
                3 Montagne Du Parc               Frankfurt
                1000 Brussels
                BELGIUM

1 of 14

COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK

Correspondent banks are listed for information only. April 11, 2001

BERMUDA         The Bank of Bermuda Limited      The Bank of Bermuda Ltd
                6 Front Street                   Hamilton
                Hamilton HMDX
                BERMUDA


BOTSWANA        Barclays Bank of Botswana
                Limited                          Barclays Bank of Botswana Ltd
                Barclays House, Khama Crescent   Gaborone
                Gaborone
                BOTSWANA


BRAZIL          Citibank, N.A.                   Citibank, N.A..
                Avenida Paulista, 1111           Sao Paulo
                Sao Paulo, SP 01311-920
                BRAZIL

                BankBoston, N.A.                 BankBoston, N.A.

Rua Libero Badaro, 425-29 andar Sao Paulo Sao Paulo - SP 01009-000
BRAZIL

BULGARIA        ING Bank N.V.                    ING Bank N.V.
                Sofia Branch                     Sofia
                7 Vassil Levski Street
                1000 Sofia
                BULGARIA


CANADA          Canadian Imperial Bank of
                Commerce                         Royal Bank of Canada
                Commerce Court West              Toronto
                Security Level
                Toronto, Ontario M5L 1G9
                CANADA

                Royal Bank of Canada             Royal Bank of Canada
                200 Bay Street, Suite 1500       Toronto
                15th Floor
                Royal Bank Plaza, North Tower
                Toronto
                Ontario M5J 2J5
                CANADA


CHILE           Citibank, N.A.                   Citibank, N.A.
                Avda. Andres Bello 2687          Santiago
                3rd and 5th Floors
                Santiago
                CHILE

2 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------

CHINA -
SHANGHAI        The Hongkong and Shanghai
                Banking                          Citibank, N.A.
                Corporation Limited              New York
                34/F, Shanghai Senmao
                International Building
                101 Yin Cheng East Road
                Pudong
                Shanghai 200120
                THE PEOPLE'S REPUBLIC OF CHINA

CHINA -

SHENZHEN        The Hongkong and Shanghai
                Banking                          The Chase Manhattan Bank
                Corporation Limited              Hong Kong
                1st Floor
                Century Plaza Hotel
                No.1 Chun Feng Lu
                Shenzhen
                THE PEOPLE'S REPUBLIC OF CHINA


COLOMBIA        Cititrust Colombia S.A.          Cititrust Colombia S.A.
                Fiduciaria                       Sociedad
                Sociedad Fiduciaria Santa Fe de
                Bogota Carrera 9a No
                99-02 First Floor Santa Fe de
                Bogota, D.C.
                COLOMBIA


CROATIA         Privredna banka Zagreb d.d.      Privredna banka Zagreb d.d.
                Savska c.28                      Zagreb
                10000 Zagreb
                CROATIA


CYPRUS          The Cyprus Popular Bank Ltd.     Cyprus Popular Bank
                154 Limassol Avenue              Nicosia
                P.O. Box 22032
                CY-1598 Nicosia,
                CYPRUS

CZECH REPUBLIC Ceskoslovenska Obchodni Banka,

                A.S.                             Ceskoslovenska Obchodni
                                                 Banka, A.S
                Na Prikope 14                    Prague
                115 20 Prague 1
                CZECH REPUBLIC


DENMARK         Danske Bank A/S                  Unibank A/S
                2-12 Holmens Kanal               Copenhagen
                DK 1092 Copenhagen K
                DENMARK

                                    3 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------

ECUADOR         Citibank, N.A.                   Citibank, N.A.
                Av. Republica de El Salvador y   Quito
                Naciones Unidas (Esquina)
                Quito
                ECUADOR


EGYPT           Citibank, N.A.                   Citibank, N.A.
                4 Ahmed Pasha Street             Cairo
                Garden City
                Cairo
                EGYPT


ESTONIA         Hansabank                        Esti Uhispank
                Liivalaia 8                      Tallinn
                EE0001 Tallinn
                ESTONIA


FINLAND         Merita Bank Plc                  Chase Manhattan Bank AG
                2598 Custody Services            Frankfurt
                Aleksis Kiven Katu 3-5
                FIN-00020 MERITA, Helsinki
                FINLAND


FRANCE          BNP PARIBAS S.A.                 Chase Manhattan Bank AG
                Ref 256                          Frankfurt
                BP 141
                3, Rue D'Antin
                75078 Paris
                Cedex 02
                FRANCE

                Societe Generale                 Chase Manhattan Bank AG
                50 Boulevard Haussman            Frankfurt
                75009 Paris
                FRANCE

                Credit Agricole Indosuez         Chase Manhattan Bank AG
                96 Blvd. Haussmann               Frankfurt
                75008 Paris
                FRANCE


GERMANY         Dresdner Bank AG                 Chase Manhattan Bank AG
                Juergen-Ponto-Platz 1            Frankfurt
                60284 Frankfurt/Main
                GERMANY

4 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------

GHANA           Barclays Bank of Ghana Limited   Barclays Bank of Ghana Ltd
                Barclays House, High Street      Accra
                Accra
                GHANA


GREECE          HSBC Bank plc                    Chase Manhattan Bank AG
                1, Kolokotroni Street            Frankfurt
                105 62 Athens
                GREECE


HONG KONG       The Hongkong and Shanghai
                Banking                          The Chase Manhattan Bank
                Corporation Limited              Hong Kong
                36th Floor, Sun Hung Kai Centre
                30 Harbour Road
                Wan Chai
                HONG KONG


HUNGARY         Citibank Rt.                     Citibank Rt.
                Szabadsag ter 7-9                Budapest
                H-1051 Budapest V
                HUNGARY


INDIA           The Hongkong and Shanghai
                Banking                          The Hongkong and Shanghai
                Corporation Limited              Banking Corporation Limited
                Sudam Kalu Ahire Marg, Worli     Mumbai
                Mumbai 400 025
                INDIA

                Deutsche Bank AG                 Deutsche Bank AG
                Kodak House                      Mumbai
                222 D.N. Road, Fort
                Mumbai 400 001
                INDIA

                Standard Chartered Bank          Standard Chartered Bank
                Phoenix Centre, Phoenix Mills    Mumbai
                Compound
                Senapati Bapat Marg, Lower Parel
                Mumbai 400 013
                INDIA


INDONESIA       The Hongkong and Shanghai        Standard Chartered Bank
                Banking                          Jakarta
                Corporation Limited
                World Trade Center
                Jl. Jend Sudirman Kav. 29-31
                Jakarta 10023
                INDONESIA

                                    5 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


                Standard Chartered Bank          Standard Chartered Bank
                Jl. Jend Sudirman Kav. 33-A      Jakarta
                Jakarta 10220
                INDONESIA


IRELAND         Bank of Ireland                  Chase Manhattan Bank AG

International Financial Services Frankfurt Centre
1 Harbourmaster Place
Dublin 1
IRELAND

                Allied Irish Banks, p.l.c.       Chase Manhattan Bank AG
                P.O. Box 518                     Frankfurt
                International Financial Services
                Centre
                Dublin 1
                IRELAND


ISRAEL          Bank Leumi le-Israel B.M.        Bank Leumi Le-Israel B.M.
                35, Yehuda Halevi Street         Tel Aviv
                61000 Tel Aviv
                ISRAEL


ITALY           BNP PARIBAS S.A.                 Chase Manhattan Bank AG
                2 Piazza San Fedele              Frankfurt
                20121 Milan
                ITALY


IVORY COAST     Societe Generale de Banques en   Societe Generale
                Cote                             Paris
                d'Ivoire

5 et 7, Avenue J. Anoma - 01 B.P. 1355 Abidjan 01
IVORY COAST

JAMAICA         CIBC Trust and Merchant Bank     CIBC Trust and Merchant Bank
                Jamaica Limited                  Jamaica Limited
                23-27 Knutsford Blvd.            Kingston
                Kingston 10
                JAMAICA


JAPAN           The Fuji Bank, Limited           The Chase Manhattan Bank
                6-7 Nihonbashi-Kabutocho         Tokyo
                Chuo-Ku
                Tokyo 103
                JAPAN

6 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------

                The Bank of Tokyo-Mitsubishi,    The Chase Manhattan Bank
                Limited                          Tokyo
                3-2 Nihombashi Hongkucho 1-chome
                Chuo-ku
                Tokyo 103
                JAPAN


JORDAN          Arab Bank Plc                    Arab Bank Plc
                P O Box 950544-5                 Amman
                Amman
                Shmeisani
                JORDAN


KAZAKHSTAN      ABN AMRO Bank Kazakhstan         ABN AMRO Bank Kazakhstan
                45, Khadzhi Mukana Street        Almaty
                480099 Almaty
                KAZAKHSTAN


KENYA           Barclays Bank of Kenya Limited   Barclays Bank of Kenya Ltd
                c/o Barclaytrust Investment      Nairobi
                Services & Limited
                Mezzanine 3, Barclays Plaza,
                Loita Street
                Nairobi
                KENYA


LATVIA          A/S Hansabanka                   A/S Hansabanka
                Kalku iela 26                    Riga
                Riga, LV 1050
                LATVIA


LEBANON         HSBC Bank Middle East            The Chase Manhattan Bank
                Ras-Beirut Branch                New York
                P.O. Box 11-1380
                Abdel Aziz
                Ras-Beirut
                LEBANON


LITHUANIA       Vilniaus Bankas AB               Vilniaus Bankas AB
                Ukmerges str. 41-106             Vilnius
                LT 2662 Vilnius
                LITHUANIA


LUXEMBOURG      Banque Generale du Luxembourg S.AChase Manhattan Bank AG
                50 Avenue J.F. Kennedy           Frankfurt
                L-2951
                LUXEMBOURG

                                    7 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


MALAYSIA        The Chase Manhattan Bank (M)     The Chase Manhattan Bank
                Berhad                           (M) Berhad
                Menara Dion, Level 26            Kuala Lumpur
                Jalan Sultan Ismail
                50250, Kuala Lumpur
                MALAYSIA

                HSBC Bank Malaysia Berhad        HSBC Bank Malaysia Berhad
                2 Leboh Ampang                   Kuala Lumpur
                50100 Kuala Lumpur
                MALAYSIA


MAURITIUS       The Hongkong and Shanghai BankingThe Hongkong and Shanghai
                Corporation Limited              Banking Corporation Limited
                5/F Les Cascades Building        Port Louis
                Edith Cavell Street
                Port Louis
                MAURITIUS

MEXICO Chase Manhattan Bank Mexico, S.A.Chase Manhattan Bank Mexico, Torre Optima S.A. Paseo de las Palmas #405 Piso 15 Mexico, D.F Lomas de Chapultepec
11000 Mexico, D. F.

MEXICO

                Citibank Mexico, S.A.            Citibank Mexico, S.A.
                Paseo de la Reforma 390          Mexico, D.F
                06695 Mexico, D.F.
                MEXICO


MOROCCO         Banque Commerciale du Maroc S.A. Banque Commerciale du Maroc S.A
                2 Boulevard Moulay Youssef       Casablanca
                Casablanca 20000
                MOROCCO


NAMIBIA         Standard Bank Namibia Limited    Standard Corporate & Merchant
                Mutual Platz                     Bank  Johannesburg
                Cnr. Stroebel and Post Streets
                P.O.Box 3327
                Windhoek
                NAMIBIA


NETHERLANDS     ABN AMRO N.V.                    Chase Manhattan Bank AG
                Kemelstede 2                     Frankfurt
                P. O. Box 3200
                4800 De Breda
                NETHERLANDS

8 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------

                Fortis Bank (Nederland) N.V.     Chase Manhattan Bank AG
                55 Rokin                         Frankfurt
                P.O. Box 243
                1000 AE Amsterdam
                NETHERLANDS


NEW ZEALAND     National Nominees Limited        National Bank of New Zealand
                Level 2 BNZ Tower                Wellington
                125 Queen Street
                Auckland
                NEW ZEALAND


*NIGERIA*       Stanbic Merchant Bank Nigeria    Standard Bank of South Africa
                Limited                          Johannesburg
                188 Awolowo Road
                P.O. Box 54746
                Falomo, Ikoyi
                Lagos
                NIGERIA

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER
FOR FURTHER INFORMATION.*

NORWAY          Den norske Bank ASA              Den norske Bank ASA
                Stranden 21                      Oslo
                PO Box 1171 Sentrum
                N-0107 Oslo
                NORWAY


OMAN            HSBC Bank Middle East            Oman Arab Bank
                Bait Al Falaj Main Office        Muscat
                Ruwi, Muscat PC 112
                OMAN


PAKISTAN        Citibank, N.A.                   Citibank, N.A.
                AWT Plaza                        Karachi
                I.I. Chundrigar Road
                Karachi 74200
                PAKISTAN

                Deutsche Bank AG                 Deutsche Bank AG
                Unitowers                        Karachi
                I.I. Chundrigar Road
                Karachi 74200
                PAKISTAN

                                    9 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


                Standard Chartered Bank          Standard Chartered Bank
                Box 4896                         Karachi
                Ismail Ibrahim Chundrigar Road
                Karachi 74200
                PAKISTAN


PERU            Citibank, N.A.                   Banco de Credito del Peru
                Camino Real 457                  Lima
                Torre Real - 5th Floor
                San Isidro, Lima 27
                PERU


PHILIPPINES     The Hongkong and Shanghai BankingThe Hongkong and Shanghai
                Corporation Limited              Banking Corporation Limited
                30/F Discovery Suites            Manila
                25 ADB Avenue
                Ortigas Center
                Pasig City, Manila
                PHILIPPINES


POLAND          Bank Handlowy w. Warszawie S.A.  Bank Rozwoju Eksportu S.A.
                ul. Senatorska 16                Warsaw
                00-082 Warsaw
                POLAND

                Bank Polska Kasa Opieki S.A.     Bank Rozwoju Eksportu S.A.
                11 Lucka street                  Warsaw
                00-950 Warsaw
                POLAND

PORTUGAL Banco Espirito Santo e Comercial Chase Manhattan Bank AG de Lisboa, S.A. Frankfurt Rua Mouzinho da Silveira, 36 R/c 1250 Lisbon
PORTUGAL

Banco Comercial Portugues, S.A. Chase Manhattan Bank AG Rua Augusta, 62174 Frankfurt 1100 Lisbon
PORTUGAL

ROMANIA         ABN AMRO Bank (Romania) S.A.     ABN AMRO Bank (Romania) S.A.
                World Trade Centre Building-E,   Bucharest
                2nd Floor
                Bld. Expozitiei Nr. 2
                78334 Bucharest 1
                ROMANIA

                                    10 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


                ING Bank N.V.                    ING Bank N.V.
                13-15 Kiseleff Blvd              Bucharest
                Bucharest 1
                ROMANIA


*RUSSIA*        Chase Manhattan Bank             The Chase Manhattan Bank
                International
                1st Tverskaya - Yamskaya, 23     New York
                125047 Moscow                    A/C The Chase Manhattan
                RUSSIA                           London (US$ NOSTRO Account)

                Credit Suisse First Boston AO    The Chase Manhattan Bank
                Nikitsky Pereulok, 5             New York
                103009 Moscow                    A/C The Chase Manhattan
                RUSSIA                           London (US$ NOSTRO Account)

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER
FOR FURTHER INFORMATION.*

SINGAPORE       Standard Chartered Bank          Oversea-Chinese Banking
                3/F, 6 Battery Road              Corporation
                049909                           Singapore
                SINGAPORE


SLOVAK REPUBLIC Ceskoslovenska Obchodni          Ceskoslovenska Obchodni
                Banka, A.S.                      Banka, A.S.
                Michalska 18                     Bratislava
                815 63 Bratislava
                SLOVAK REPUBLIC


SLOVENIA        Bank Austria Creditanstalt d.d.  Bank Austria Creditanstalt d.d.
                Ljubljana                        Ljubljana
                Kotnikova 5
                SL-61104 Ljubljana
                SLOVENIA


SOUTH AFRICA    The Standard Bank of South       Standard Corporate & Merchant
                Africa Limited                   Bank
                Standard Bank Centre             Johannesburg
                1st Floor
                5 Simmonds Street
                Johannesburg 2001
                SOUTH AFRICA


SOUTH KOREA     The Hongkong and Shanghai BankingThe Hongkong and Shanghai
                Corporation Limited              Banking
                5/F HSBC Building                Corporation Limited
                #25, Bongrae-dong 1-ga           Seoul
                Seoul
                SOUTH KOREA

                                    11 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


                Standard Chartered Bank          Standard Chartered Bank
                22/F, Seoul Finance Centre       Seoul
                Building 63, Mukyo-dong, Chung-Ku
                Seoul
                SOUTH KOREA


SPAIN           Chase Manhattan Bank CMB, S.A.   Chase Manhattan Bank AG
                Paseo de la Castellana, 51       Frankfurt
                28046 Madrid
                SPAIN


SRI LANKA       The Hongkong and Shanghai BankingThe Hongkong and Shanghai
                Corporation Limited              Banking Corporation Limited
                Unit #02-02, West Block Podium   Colombo
                World Trade Center
                Colombo 1
                SRI LANKA

SWEDEN          Skandinaviska Enskilda Banken    Svenska Handelsbanken
                Sergels Torg 2                   Stockholm
                SE-106 40 Stockholm
                SWEDEN


SWITZERLAND     UBS AG                           UBS AG
                45 Bahnhofstrasse                Zurich
                8021 Zurich
                SWITZERLAND


TAIWAN          The Chase Manhattan Bank         The Chase Manhattan Bank
                14th Floor                       Taipei
                2, Tun Hwa S. Road Sec. 1
                Taipei
                TAIWAN

                The Hongkong and Shanghai BankingThe Hongkong and Shanghai
                Corporation Limited              Banking Corporation Limited
                International Trade Building     Taipei
                16th Floor, Taipei World Trade
                Center
                333 Keelung Road, Section 1
                Taipei 110
                TAIWAN


THAILAND        Standard Chartered Bank          Standard Chartered Bank
                14th Floor, Zone B               Bangkok
                Sathorn Nakorn Tower
                100 North Sathorn Road
                Bangrak, Bangkok 10500
                THAILAND

                                    12 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


TUNISIA         Banque Internationale Arabe de   Banque Internationale Arabe de
                Tunisie, S.A.                    Tunis
                S.A.
                70-72 Avenue Habib Bourguiba
                P.O. Box 520
                1080 Tunis Cedex
                TUNISIA


TURKEY          The Chase Manhattan Bank         The Chase Manhattan Bank
                Emirhan Cad. No: 145             Istanbul
                Atakule, A Blok Kat:11
                80700-Dikilitas/Besiktas
                Istanbul
                TURKEY


*UKRAINE*       ING Bank Ukraine                 ING Bank Ukraine
                28 Kominterna Street             Kiev
                5th Floor
                Kiev, 252032
                UKRAINE

*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER
FOR FURTHER INFORMATION.*

U.A.E.          HSBC Bank Middle East            The National Bank of Abu Dhabi
                P.O. Box 66                      Abu Dhabi
                Dubai
                UNITED ARAB EMIRATES

U.K.            The Chase Manhattan Bank         National Westminster Bank
                Crosby Court                     London
                Ground Floor
                38 Bishopsgate
                London EC2N 4AJ
                UNITED KINGDOM


URUGUAY         BankBoston, N.A.                 BankBoston, N.A.
                Zabala 1463                      Montevideo
                Montevideo
                URUGUAY


U.S.A.          The Chase Manhattan Bank         The Chase Manhattan Bank
                4 New York Plaza                 New York
                New York
                NY 10004
                U.S.A.

13 of 14

COUNTRY           SUB-CUSTODIAN                  CORRESPONDENT BANK
-------           -------------                  ------------------


VENEZUELA       Citibank, N.A.                   Citibank, N.A.
                Carmelitas a Altagracia          Caracas
                Edificio Citibank
                Caracas 1010
                VENEZUELA

ZAMBIA Barclays Bank of Zambia Limited Barclays Bank of Zambia Ltd Kafue House, Cairo Road Lusaka Lusaka
ZAMBIA

ZIMBABWE Barclays Bank of Zimbabwe LimitedBarclays Bank of Zimbabwe Ltd 2nd Floor, 3 Anchor House Harare Jason Mayo Avenue
Harare

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SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------
 Argentina              CVSA                                               Equity, Corporate Debt, Government Debt
                        (Caja de Valores S.A.)
--------------------------------------------------------------------------------------------------------------------
 Argentina              CRYL                                               Government Debt
                        (Central de Registration y Liquidacion de
                        Instrumentos de Endeudamiento Publico)
--------------------------------------------------------------------------------------------------------------------
 Australia              Austraclear Limited                                Corporate Debt, Money Market,
                                                                           Semi-Government Debt
--------------------------------------------------------------------------------------------------------------------
 Australia              CHESS                                              Equity
                        (Clearing House Electronic Sub-register System)
--------------------------------------------------------------------------------------------------------------------
 Australia              RITS                                               Government Debt
                        (Reserve Bank of Australia/Reserve Bank
                        Information and Transfer System)
--------------------------------------------------------------------------------------------------------------------
 Austria                OeKB                                               Equity, Corporate Debt, Government Debt
                        (Oesterreichische Kontrollbank AG)
--------------------------------------------------------------------------------------------------------------------
 Belgium                CIK                                                Equity, Corporate Debt
                        (Caisse Interprofessionnelle de Depots et de
                        Virements de Titres S.A.)
--------------------------------------------------------------------------------------------------------------------
 Belgium                NBB                                                Corporate Debt, Government Debt
                        (National Bank of Belgium)
--------------------------------------------------------------------------------------------------------------------
 Brazil                 CBLC                                               Equity
                        (Companhia Brasileira de Liquidacao e Custodia)
--------------------------------------------------------------------------------------------------------------------
 Brazil                 CETIP                                              Corporate Debt
                        (Central de Custodia e Liquidacao Financiera
                        de Titulos Privados)
--------------------------------------------------------------------------------------------------------------------
 Brazil                 SELIC                                              Government Debt
                        (Sistema Especial de Liquidacao e Custodia)
--------------------------------------------------------------------------------------------------------------------
 Bulgaria               BNB                                                Government Debt
                        (Bulgaria National Bank)
--------------------------------------------------------------------------------------------------------------------
 Bulgaria               CDAD                                               Equity, Corporate Debt
                        (Central Depository A.D.)
--------------------------------------------------------------------------------------------------------------------
 Canada                 CDS                                                Equity, Corporate, Government Debt
                        (The Canadian Depository for Securities
                        Limited)
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

1

[LOGO]

JP MORGAN

SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
 Chile                  DCV                                                Equity, Corporate Debt, Government Debt
                        (Deposito Central de Valores S.A.)
--------------------------------------------------------------------------------------------------------------------
 China, Shanghai        SSCCRC                                             Equity
                        (Shanghai Securities Central Clearing and
                        Registration Corporation)
--------------------------------------------------------------------------------------------------------------------
 China, Shenzhen        SSCC                                               Equity
                        (Shenzhen Securities Clearing Company, Limited)
--------------------------------------------------------------------------------------------------------------------
 Colombia               DCV                                                Government Debt
                        (Deposito Central de Valores)
--------------------------------------------------------------------------------------------------------------------
 Colombia               DECEVAL                                            Equity, Corporate Debt, Government Debt
                        (Deposito Centralizado de Valores de Colombia
                        S.A.)
--------------------------------------------------------------------------------------------------------------------
 Croatia                SDA                                                Equity, Government Debt
                        (Central Depository Agency Inc. - Stredisnja
                        depozitarna agencija d.d.)
--------------------------------------------------------------------------------------------------------------------
 Croatia                Ministry of Finance of the Republic of Croatia     Short-term debt issued by the Ministry of
                                                                           Finance.
--------------------------------------------------------------------------------------------------------------------
 Croatia                CNB                                                Short-term debt issued by the National
                        (Croatian National Bank)                           Bank of Croatia.
--------------------------------------------------------------------------------------------------------------------
 Czech Republic         SCP                                                Equity, Corporate Debt, Government Debt
                        (Stredisko cennych papiru)
--------------------------------------------------------------------------------------------------------------------
 Czech Republic         CNB                                                Government Debt
                        (Czech National Bank)
--------------------------------------------------------------------------------------------------------------------
 Denmark                VP                                                 Equity, Corporate Debt, Government Debt
                        (Vaerdipapircentralen A/S)
--------------------------------------------------------------------------------------------------------------------
 Egypt                  MCSD                                               Equity, Corporate Debt
                        (Misr for Clearing, Settlement and Depository,
                        S.A.E.)
--------------------------------------------------------------------------------------------------------------------
 Estonia                ECDS                                               Equity, Corporate Debt, Government Debt
                        (Estonian Central Depository for Securities
                        Limited - Eesti Vaatpaberite Keskdepositoorium)
--------------------------------------------------------------------------------------------------------------------
 Euromarket             DCC                                                Euro-CDs
                        (The Depository and Clearing Centre)
--------------------------------------------------------------------------------------------------------------------
 Euromarket             Clearstream                                        Euro-Debt
                        (Clearstream Banking, S.A.)
--------------------------------------------------------------------------------------------------------------------
 Euromarket             Euroclear                                          Euro-Debt
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

2

[LOGO]

JP MORGAN

SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------
 Finland                APK                                                Equity, Corporate Debt, Government Debt
                        (Finnish Central Securities Depository Limited)
--------------------------------------------------------------------------------------------------------------------
 France                 Euroclear France                                   Equity, Corporate Debt, Government Debt
--------------------------------------------------------------------------------------------------------------------
 Germany                Clearstream                                        Equity, Corporate Debt, Government Debt
                        (Clearstream Banking AG)
--------------------------------------------------------------------------------------------------------------------
 Greece                 CSD                                                Equity, Corporate Debt
                        (Central Securities Depository S.A.)
--------------------------------------------------------------------------------------------------------------------
 Greece                 BoG                                                Government Debt
                        (Bank of Greece)
--------------------------------------------------------------------------------------------------------------------
 Hong Kong              HKSCC                                              Equity
                        (Hong Kong Securities Clearing Company Limited)
--------------------------------------------------------------------------------------------------------------------
 Hong Kong              CMU                                                Corporate Debt, Government Debt
                        (Central Moneymarkets Unit)
--------------------------------------------------------------------------------------------------------------------
 Hungary                KELER                                              Equity, Corporate Debt, Government Debt
                        (Central Clearing House and Depository
                        (Budapest) Ltd. - Kozponti Elszamolohaz es
                        Ertektar (Budapest) Rt.)
--------------------------------------------------------------------------------------------------------------------
 India                  NSDL                                               Equity, Corporate Debt, Government Debt
                        (National Securities Depository Limited)
--------------------------------------------------------------------------------------------------------------------
 India                  CDSL                                               Equity
                        (Central Depository Services (India) Limited)
--------------------------------------------------------------------------------------------------------------------
 India                  RBI                                                Government Debt
                        (Reserve Bank of India)
--------------------------------------------------------------------------------------------------------------------
 Indonesia              KSEI                                               Equity, Corporate Debt
                        (PT Kustodian Sentral Efek Indonesia)
--------------------------------------------------------------------------------------------------------------------
 Ireland                CREST                                              Equity, Corporate Debt
                        (CRESTCo Limited)
--------------------------------------------------------------------------------------------------------------------
 Israel                 TASE Clearing House                                Equity, Corporate Debt, Government Debt
                        (Tel Aviv Stock Exchange Clearing House)
--------------------------------------------------------------------------------------------------------------------
 Italy                  Monte Titoli S.p.A.                                Equity, Corporate Debt, Government Debt
--------------------------------------------------------------------------------------------------------------------
 Italy                  Banca d'Italia                                     Government Debt
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

3

[LOGO]

JP MORGAN

SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
 Ivory Coast            DC/BR                                              Equity
                        (Le Depositaire Central / Banque de Reglement)
--------------------------------------------------------------------------------------------------------------------
 Japan                  JASDEC                                             Equity, Convertible Debt
                        (Japan Securities Depository Center)
--------------------------------------------------------------------------------------------------------------------
 Japan                  BoJ                                                Registered Government Debt
                        (Bank of Japan)
--------------------------------------------------------------------------------------------------------------------
 Kazahkstan             CSD                                                Equity
                        (Central Securities Depository CJSC)
--------------------------------------------------------------------------------------------------------------------
 Kenya                  CBCD                                               Government Debt
                        (Central Bank Central Depository)
--------------------------------------------------------------------------------------------------------------------
 Latvia                 LCD                                                Equity, Corporate Debt, Government Debt
                        (Latvian Central Depository)
--------------------------------------------------------------------------------------------------------------------
 Lebanon                Midclear S.A.L.                                    Equity
                        (Custodian and Clearing Center of Financial
                        Instruments for Lebanon and the Middle East
                        S.A.L.)
--------------------------------------------------------------------------------------------------------------------
 Lithuania              CSDL                                               Equity, Corporate Debt, Government Debt
                        (Central Securities Depository of Lithuania)
--------------------------------------------------------------------------------------------------------------------
 Luxembourg             Clearstream                                        Equity
                        (Clearstream Banking S.A.)
--------------------------------------------------------------------------------------------------------------------
 Malaysia               MCD                                                Equity, Corporate Debt, Government Debt
                        (Malaysian Central Depository Sdn. Bhd.)
--------------------------------------------------------------------------------------------------------------------
 Mauritius              CDS                                                Equity, Corporate Debt
                        (Central Depository and Settlement Company
                        Limited)
--------------------------------------------------------------------------------------------------------------------
 Mexico                 INDEVAL                                            Equity, Corporate Debt, Government Debt
                        (S.D. INDEVAL S.A. de C.V.)
--------------------------------------------------------------------------------------------------------------------
 Morocco                Maroclear                                          Equity, Corporate Debt, Government Debt
--------------------------------------------------------------------------------------------------------------------
 Netherlands            NECIGEF                                            Equity, Corporate Debt, Government Debt
                        (Nederlands Centraal Insituut voor Giraal
                        Effectenverkeer B.V.)
--------------------------------------------------------------------------------------------------------------------
 New Zealand            NZCSD                                              Equity, Corporate Debt, Government Debt
                        (New Zealand Central Securities Depository)
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

4

[LOGO]

JP MORGAN

SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
 Nigeria                CSCS                                               Equity, Corporate Debt, Government Debt
                        (Central Securities Clearing System Limited)
--------------------------------------------------------------------------------------------------------------------
 Norway                 VPS                                                Equity, Corporate Debt, Government Debt
                        (Verdipapirsentralen)
--------------------------------------------------------------------------------------------------------------------
 Oman                   MDSRC                                              Equity, Corporate Debt
                        (The Muscat Depository and Securities
                        Registration Company, S.A.O.C.)
--------------------------------------------------------------------------------------------------------------------
 Pakistan               CDC                                                Equity, Corporate Debt
                        (Central Depository Company of Pakistan
                        Limited)
--------------------------------------------------------------------------------------------------------------------
 Pakistan               SBP                                                Government Debt
                        (State Bank of Pakistan)
--------------------------------------------------------------------------------------------------------------------
 Peru                   CAVALI                                             Equity, Corporate Debt, Government Debt
                        (CAVALI ICLV S.A.)
--------------------------------------------------------------------------------------------------------------------
 Philippines            PCD                                                Equity
                        (Philippine Central Depository, Inc.)
--------------------------------------------------------------------------------------------------------------------
 Philippines            ROSS                                               Government Debt
                        (Bangko Sentral ng Pilipinas / Register of
                        Scripless Securities)
--------------------------------------------------------------------------------------------------------------------
Poland                 NDS                                                Equity, Long-Term Government Debt
                        (National Depository for Securities S.A.)
--------------------------------------------------------------------------------------------------------------------
Poland                 CRT                                                Short-Term Government Debt
                        (Central Registry of Treasury-Bills)
--------------------------------------------------------------------------------------------------------------------
 Portugal               CVM                                                Equity, Corporate Debt, Government Debt
                        (Central de Valores Mobiliarios e Sistema de
                        Liquidacao e Compensacao)
--------------------------------------------------------------------------------------------------------------------
 Romania                SNCDD                                              Equity
                        (National Company for Clearing, Settlement and
                        Depository for Securities)
--------------------------------------------------------------------------------------------------------------------
 Romania                BSE                                                Equity
                        (Bucharest Stock Exchange Registry)
--------------------------------------------------------------------------------------------------------------------
 Russia                 VTB                                                Equity, Corporate Debt, Government Debt
                        (Vneshtorgbank)                                    (Ministry of Finance Bonds)
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

5

[LOGO]

JP MORGAN

SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------

 Russia                 NDC                                                Equity, Corporate Debt, Government Debt
                        (National Depository Centre)
--------------------------------------------------------------------------------------------------------------------
 Russia                 DCC                                                Equity
                        (Depository Clearing Company)
--------------------------------------------------------------------------------------------------------------------
 Singapore              CDP                                                Equity, Corporate Debt
                        (The Central Depository (Pte) Limited)
--------------------------------------------------------------------------------------------------------------------
 Singapore              SGS                                                Government Debt
                        (Monetary Authority of Singapore / Singapore
                        Government Securities Book-Entry System)
--------------------------------------------------------------------------------------------------------------------
 Slovak Republic        SCP                                                Equity, Corporate Debt, Government Debt
                        (Stredisko cennych papierov SR Bratislava,
                        a.s.)
--------------------------------------------------------------------------------------------------------------------
 Slovak Republic        NBS                                                Government Debt
                        (National Bank of Slovakia)
--------------------------------------------------------------------------------------------------------------------
 Slovenia               KDD                                                Equity, Corporate Debt, Government Debt
                        (Centralna klirinsko depotna druzba d.d.)
--------------------------------------------------------------------------------------------------------------------
 South Africa           CDL                                                Corporate Debt, Government Debt
                        (Central Depository (Pty) Limited)
--------------------------------------------------------------------------------------------------------------------
 South Africa           STRATE                                             Equity
                        (Share Transactions Totally Electronic)
--------------------------------------------------------------------------------------------------------------------
 South Korea            KSD                                                Equity, Corporate Debt, Government Debt
                        (Korea Securities Depository)
--------------------------------------------------------------------------------------------------------------------
 Spain                  SCLV                                               Equity, Corporate Debt
                        (Servicio de Compensacion y Liquidacion de Valores,
                        S.A.)
--------------------------------------------------------------------------------------------------------------------
 Spain                  CBEO                                               Government Debt
                        (Banco de Espana / Central Book Entry Office)
--------------------------------------------------------------------------------------------------------------------
 Sri Lanka              CDS                                                Equity, Corporate Debt
                        (Central Depository System (Private) Limited)
--------------------------------------------------------------------------------------------------------------------
 Sweden                 VPC                                                Equity, Corporate Debt, Government Debt
                        (Vardepapperscentralen AB)
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

6

[LOGO]

JP MORGAN

SECURITIES DEPOSITORIES

--------------------------------------------------------------------------------------------------------------------
       COUNTRY                            DEPOSITORY                                            INSTRUMENTS
--------------------------------------------------------------------------------------------------------------------
 Switzerland            SIS                                                Equity, Corporate Debt, Government Debt
                        (SIS SegaInterSettle AG)
--------------------------------------------------------------------------------------------------------------------
 Taiwan                 TSCD                                               Equity, Government Debt
                        (Taiwan Securities Central Depository Co.,
                        Ltd.)
--------------------------------------------------------------------------------------------------------------------
 Thailand               TSD                                                Equity, Corporate Debt, Government Debt
                        (Thailand Securities Depository Company
                        Limited)
--------------------------------------------------------------------------------------------------------------------
 Tunisia                STICODEVAM                                         Equity, Corporate Debt, Government Debt
                        (Societe Tunisienne Interprofessionnelle pour
                        la Compensation et le Depot des Valeurs
                        Mobilieres)
--------------------------------------------------------------------------------------------------------------------
 Turkey                 TAKASBANK                                          Equity, Corporate Debt, Government Debt
                        (IMKB Takas ve Saklama Bankasi A.S.)
--------------------------------------------------------------------------------------------------------------------
 United Kingdom         CREST                                              Equity, Corporate Debt, Government Debt
                        (CRESTCo Limited)
--------------------------------------------------------------------------------------------------------------------
 United Kingdom         CMO                                                Sterling & Euro CDs, Commercial Paper
                        (Central Moneymarkets Office)
--------------------------------------------------------------------------------------------------------------------
 United States          DTC                                                Equity, Corporate Debt
                        (Depository Trust Company)
--------------------------------------------------------------------------------------------------------------------
 United States          PTC                                                Mortgage Back Debt
                        (Participants Trust Company)
--------------------------------------------------------------------------------------------------------------------
 United States          FED                                                Government Debt
                        (The Federal Reserve Book-Entry System)
--------------------------------------------------------------------------------------------------------------------
 Uruguay                BCU                                                Corporate Debt, Government Debt
                        (Banco Central del Uruguay)
--------------------------------------------------------------------------------------------------------------------
 Venezuela              BCV                                                Government Debt
                        (Banco Central de Venezuela)
--------------------------------------------------------------------------------------------------------------------
 Zambia                 CSD                                                Equity, Government Debt
                        (LuSE Central Shares Depository Limited)
--------------------------------------------------------------------------------------------------------------------
 Zambia                 BoZ                                                Government Debt
                        (Bank of Zambia)
--------------------------------------------------------------------------------------------------------------------

This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

April 19, 2001

7

EXHIBIT 1 - AMENDMENT #1

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001 (the "Agreement") by and between The Chase Manhattan Bank ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Specialized Funds
Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

1

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of July 23, 2001 BY:

Chase Manhattan Bank                   Each Fund listed on Exhibit 1

By:      /s James E. Cecere, Jr.       By:      /s Robert D. Snowden

Name:    James E. Cecere, Jr.          Name:    Robert D. Snowden

Title:   Vice President                Title:   Assistant Treasurer

2

EXHIBIT 1 - AMENDMENT #2

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001 and amended July 23, 2001 (the "Agreement") by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund


Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of May 20, 2002 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /S/ JAMES E. CECERE, JR.               By:      /S/ THOMAS J. HIGGINS

Name:    James E. Cecere, Jr.                   Name:    Thomas J. Higgins

Title:   Vice President                         Title:   Treasurer


EXHIBIT 1 - AMENDMENT #4

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001 and amended July 23, 2001, May 20, 2002, and November 15, 2002 (the "Agreement") by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2045 Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of September 18, 2003 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /S/ JAMES E. CECERE, JR.                By:      /S/ THOMAS J. HIGGINS

Name:    James E. Cecere, Jr.                    Name:    Thomas J. Higgins

Title:   Vice President                          Title:   Treasurer


AMENDMENT TO GLOBAL CUSTODY AGREEMENT

This instrument, dated November 25, 2003, is between each open-end management investment company listed on Exhibit 1 attached to the Global Custody Agreement (each a "Trust") collectively ("Customer"), and JPMorgan Chase Bank ("Bank"). It amends the Global Custody Agreement, dated June 25, 2001 (as amended), (the "Custody Agreement") between Customer and Bank.

RECITAL

Customer and Bank wish to amend the Custody Agreement to reflect changes to the proxy voting service provided by Bank.

AMENDMENT

1. Amendment to the Custody Agreement.

The existing clause 2.11 shall be deleted and replaced with the following new clause 2.11:-

"2.11 Proxy Voting.

(a) Bank shall provide Customer or its agent with details of Securities in the Account on a daily basis ("Daily Holdings Data"), and Bank or its agent shall act in accordance with Instructions from an Authorized Person in relation to matters Customer or its agent determine in their absolute discretion are to be voted upon at meetings of holders of Financial Assets, based upon such Daily Holdings Data ("the proxy voting service"). Neither Bank nor its agent shall be under any duty to provide Customer or its agent with information which it or they receive on matters to be voted upon at meetings of holders of Financial Assets.

(b) Bank or its agent shall act upon Instructions to vote, provided Instructions are received by Bank or its agent at its proxy voting department by the relevant deadline for such Instructions as determined by Bank or its agent. If Instructions are not received in a timely manner, neither Bank nor its agent shall be obligated to provide further notice to Customer.


(c) In markets where the proxy voting service is not available or where Bank has not received a duly completed enrollment form or other relevant documentation, Bank or its agent shall endeavor to act upon Instructions to vote on matters before meetings of holders of Financial Assets where it is reasonably practicable for Bank or its agent (or its Subcustodians or nominees as the case may be) to do so and where such Instructions are received in time for Bank or its agent to take timely action.

(d) Customer acknowledges that the provision of the proxy voting service may be precluded or restricted under a variety of circumstances. These circumstances include, but are not limited to: (i) the Financial Assets being on loan or out for registration, (ii) the pendency of conversion or another corporate action, or (iii) Financial Assets being held at Customer's request in a name not subject to the control of Bank or its Subcustodian, in a margin or collateral account at Bank or another bank or broker, or otherwise in a manner which affects voting, local market regulations or practices, or restrictions by the issuer. Additionally, in some markets, Bank may be required to vote all shares held for a particular issue for all of Bank's customers in the same way. Bank or its agent shall inform Customer or its agent where this is the case.

(e) Notwithstanding the fact that Bank may act in a fiduciary capacity with respect to Customer under other agreements or otherwise hereunder, in performing the proxy voting service Bank shall be acting solely as the agent of Customer, and shall not exercise any discretion with regard to such proxy voting service or vote any proxy except when directed by an Authorized Person."

2. Miscellaneous.

(a) This Amendment shall be governed under the laws of the United States or State of New York, as applicable, without regard to New York's principles regarding conflict of laws.

2

(b) This Amendment shall be binding upon and inure to the benefit of the parties and their respective heirs, successors and permitted assigns when executed by all parties. Nothing in this Amendment, express or implied, shall be construed to confer any rights or remedies upon any party other than the parties hereto and their respective successors and permitted assigns.

(c) All defined terms used in this Amendment shall have the same meaning as provided in the Custody Agreement except where specifically herein modified.

(d) As modified and amended hereby, the parties hereby ratify, approve and confirm the Custody Agreement in all respects.

(e) This Amendment may not be changed orally, but only by an agreement in writing signed by the parties hereto.

(f) This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

3. Effective Time.

This Amendment shall be effective as of November 25, 2003.

JPMORGAN CHASE BANK EACH TRUST LISTED IN EXHIBIT 1 OF

THE CUSTODY AGREEMENT

By:      /S/ JAMES E. CECERE, JR.              By:      /S/ THOMAS J. HIGGINS

Name:    James E. Cecere, Jr.                  Name:    Thomas J. Higgins

Title:   Vice President                        Title:   Treasurer

3

EXHIBIT 1 - AMENDMENT #5

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2045 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Large-Cap Index Fund Vanguard Mid-Cap Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of May 13, 2004 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /S/ Nela D'Agosta                   By:  /S/ THOMAS J. HIGGINS

Name:    Nela D'Agosta                       Name:    Thomas J. Higgins

Title:   Vice President                      Title:   Treasurer

Page 2 of 2

EXHIBIT 1 - AMENDMENT #6

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2045 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Large-Cap Index Fund Vanguard Mid-Cap Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund


Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of August 27, 2004 BY:

JPMorgan Chase Bank                        Each Fund listed on Exhibit 1

By:      /s Nela D'Agosta                  By:      /s Thomas J. Higgins

Name:    Nela D'Agosta                     Name:    Thomas J. Higgins

Title:   Vice President                             Title:   Treasurer


EXHIBIT 1 - AMENDMENT #7

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Balanced Index Fund
Vanguard Balanced Index Fund

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2045 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund


Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of February 28, 2006 BY:

JPMorgan Chase Bank                         Each Fund listed on Exhibit 1

By:     /s/Nela D'Agosta                    By:     /s/Thomas J. Higgins
        ----------------                            --------------------

Name:   Nela D'Agosta                       Name:   Thomas J. Higgins

Title:  Vice President                      Title:  Treasurer


EXHIBIT 1 - AMENDMENT #8

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Balanced Index Fund
Vanguard Balanced Index Fund

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund


Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of March 22, 2006 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /s/ Nela D'Agosta                    By:      /s/ Thomas J. Higgins

Name:    Nela D'Agosta                        Name:    Thomas J. Higgins

Title:   Vice President                       Title:   Treasurer


EXHIBIT 1 - AMENDMENT #9

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.
Exhibit 1 is hereby amended as follows:

Vanguard Balanced Index Fund
Vanguard Balanced Index Fund

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund
Vanguard Short-Term Bond Index Fund
Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund
Vanguard Target Retirement 2005 Fund
Vanguard Target Retirement 2010 Fund
Vanguard Target Retirement 2015 Fund
Vanguard Target Retirement 2020 Fund
Vanguard Target Retirement 2025 Fund
Vanguard Target Retirement 2030 Fund
Vanguard Target Retirement 2035 Fund
Vanguard Target Retirement 2040 Fund
Vanguard Target Retirement 2045 Fund
Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund
Vanguard Inflation Protected Securities Fund Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund
Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Growth Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Mid-Cap Value Index Fund
Vanguard Small-Cap Growth Index Fund
Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund
Vanguard Total Stock Market Index Fund
Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund
Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund
Vanguard LifeStrategy Income Fund
Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund
Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of ____________, 2006 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:    /s/ Nela D'Agosta      By:    /s/ Thomas J. Higgins

Name:  Nela D'Agosta          Name:  Thomas J. Higgins
Title:  Vice President        Title:  Treasurer

EXHIBIT 1 - AMENDMENT #10

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Balanced Index Fund
Vanguard Balanced Index Fund

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund
o Vanguard Target Retirement 2005 Fund
o Vanguard Target Retirement 2010 Fund
o Vanguard Target Retirement 2015 Fund
o Vanguard Target Retirement 2020 Fund
o Vanguard Target Retirement 2025 Fund
o Vanguard Target Retirement 2030 Fund
o Vanguard Target Retirement 2035 Fund
o Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund
o Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Index Fund
Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard International Growth Fund

AGREED TO as of September 6, 2006 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /s/ Nela D'Agosta                        By:      /s/ Thomas J. Higgins

Name:    Nela D'Agosta                            Name:    Thomas J. Higgins

Title:   Vice President                           Title:   Treasurer


EXHIBIT 1 - AMENDMENT #11

The following is an amendment ("~mendment") to the Global Custody Agreement dated June 25,2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank) and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Balanced Index Fund
Vanguard Balanced Index Fund

Vanguard Bond Index Funds
Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund Vanguard Yorktown Liquidity Fund

Vanguard Fixed income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard I,nflation Protected Securities Fund Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Growth lndex Fund Vanguard Mid-Cap Index Fund
Vanguard Mid-Cap Value lndex Fund Vanguard Small-Cap Growth lndex Fund Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value lndex Fund

Vanguard Institutional lndex Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of 8/13,2007 BY:
                ----

JPMorgan Chase Bank                           Each Fund listed on Exhibit 1
By:  /s/Richard A. Stiefunter                 By: /s/Jean E. Drabick
     ------------------------                 ----------------------
Name: Richard A. Stiefunter                   Name: Jean E. Drabick
Title: Vice President                         Title: Assistant Treasurer


EXHIBIT 1 - AMENDMENT #12

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Balanced Index Fund
Vanguard Balanced Index Fund

Vanguard Bond Index Funds
Vanguard Inflation Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund
Vanguard Yorktown Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Large-Cap Index Fund Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of __9/17__________, 2007 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

         /s/ Paul Larkin                             /s/ Thomas Higgins
By:      _______________                    By:      ________________

Name:    Paul Larkin                        Name:    Thomas J. Higgins

Title:   Vice President                     Title:   Treasurer


EXHIBIT 1 - AMENDMENT #13

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund

#40727, 16 3/4/2008


Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Large-Cap Index Fund Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

2

#40727, 16 3/4/2008


AGREED TO as of _March 20_______, 2008 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

         /s/ Paul Larkin                             /s/ Thomas Higgins
By:      _______________                    By:      ________________

Name:    Paul Larkin                        Name:    Thomas J. Higgins

Title:   Executive Director                 Title:   Treasurer

3

EXHIBIT 1 - AMENDMENT #14

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund


Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Large-Cap Index Fund Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

2

AGREED TO as of ________, 2008 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

                                                     /s/ Thomas Higgins
By:      _______________                    By:      ________________

Name:                                       Name:    Thomas J. Higgins

Title:                                      Title:   Treasurer


EXHIBIT 1 - AMENDMENT #15

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market II Index Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund


Vanguard Index Funds
Vanguard 500 Index Fund
Vanguard Extended Market Index Fund Vanguard Growth Index Fund
Vanguard Large-Cap Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Index Fund
Vanguard Mid-Cap Value Index Fund
Vanguard Small-Cap Growth Index Fund Vanguard Small-Cap Index Fund
Vanguard Small-Cap Value Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund
Vanguard REIT Index Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund
Vanguard LifeStrategy Income Fund
Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International
Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of ___January 9_____, 2009 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /s/ Paul Larkin                     By:     /s/ Thomas J. Higgins

Name:        Paul Larkin                     Name:    Thomas J. Higgins

Title:   Executive Director                  Title:   Chief Financial Officer


EXHIBIT 1 - AMENDMENT #16

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market Index II Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard Growth Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund


Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of __August 17_, 2009 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /s/ Paul Larkin                     By:     /s/ Thomas J. Higgins

Name:        Paul Larkin                     Name:    Thomas J. Higgins

Title:   Executive Director                  Title:   Chief Financial Officer


EXHIBIT 1 - AMENDMENT #17

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market Index II Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard Growth Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund

Vanguard Institutional Index Funds
Vanguard Institutional Total Bond Market Index Fund


Vanguard Scottsdale Funds
Vanguard Short-Term Government Bond Index Fund Vanguard Intermediate-Term Government Bond Index Fund Vanguard Long-Term Government Bond Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Mortgage-Backed Securities Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of __September 23 _, 2009 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:      /s/ Paul Larkin                     By:     /s/ Thomas J. Higgins

Name:        Paul Larkin                     Name:    Thomas J. Higgins

Title:   Executive Director                  Title:   Chief Financial Officer
EXHIBIT 1 - AMENDMENT #18

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market Index II Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund
Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard Growth Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund

Vanguard Scottsdale Funds
Vanguard Short-Term Government Bond Index Fund Vanguard Intermediate-Term Government Bond Index Fund Vanguard Long-Term Government Bond Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Mortgage-Backed Securities Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of ___________________, 2010 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:     __________________________              By:_________________________

Name:   __________________________              Name:   Jean E. Drabick
Title:  __________________________              Title:  Assistant Treasurer

EXHIBIT 1 - AMENDMENT #19

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market Index II Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund Vanguard Target Retirement 2055 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund
Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard Growth Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund

Vanguard Scottsdale Funds
Vanguard Short-Term Government Bond Index Fund Vanguard Intermediate-Term Government Bond Index Fund Vanguard Long-Term Government Bond Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Mortgage-Backed Securities Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Fund
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Fund
Vanguard High Dividend Yield Index Fund
Vanguard International Explorer Fund

Vanguard World Funds
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of ___________________, 2010 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:     __________________________              By:_________________________

Name:   __________________________              Name:   Jean E. Drabick
Title:  __________________________              Title:  Assistant Treasurer

EXHIBIT 1 - AMENDMENT #20

The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001, as amended from time to time (the "Agreement"), by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1.
Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below.

Exhibit 1 is hereby amended as follows:

Vanguard Admiral Funds
Vanguard S&P 500 Growth Index Fund Vanguard S&P 500 Value Index Fund Vanguard S&P Mid-Cap 400 Growth Index Fund Vanguard S&P Mid-Cap 400 Index Fund Vanguard S&P Mid-Cap 400 Value Index Fund Vanguard S&P Small-Cap 600 Growth Index Fund Vanguard S&P Small-Cap 600 Index Fund
Vanguard S&P Small-Cap 600 Value Index Fund

Vanguard Bond Index Funds
Vanguard Inflation-Protected Securities Fund Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Total Bond Market Index II Fund

Vanguard Chester Funds
Vanguard Target Retirement Income Fund Vanguard Target Retirement 2005 Fund Vanguard Target Retirement 2010 Fund Vanguard Target Retirement 2015 Fund Vanguard Target Retirement 2020 Fund Vanguard Target Retirement 2025 Fund Vanguard Target Retirement 2030 Fund Vanguard Target Retirement 2035 Fund Vanguard Target Retirement 2040 Fund Vanguard Target Retirement 2045 Fund Vanguard Target Retirement 2050 Fund Vanguard Target Retirement 2055 Fund

Vanguard CMT Funds
Vanguard Market Liquidity Fund

Vanguard Fixed Income Securities Funds
Vanguard GNMA Fund
Vanguard High-Yield Corporate Fund
Vanguard Long-Term Investment-Grade Fund

Vanguard Index Funds
Vanguard Growth Index Fund
Vanguard Mid-Cap Growth Index Fund Vanguard Mid-Cap Value Index Fund Vanguard Small-Cap Index Fund
Vanguard Total Stock Market Index Fund

Vanguard Scottsdale Funds
Vanguard Short-Term Government Bond Index Fund Vanguard Intermediate-Term Government Bond Index Fund Vanguard Long-Term Government Bond Index Fund Vanguard Short-Term Corporate Bond Index Fund Vanguard Intermediate-Term Corporate Bond Index Fund Vanguard Long-Term Corporate Bond Index Fund Vanguard Mortgage-Backed Securities Index Fund

Vanguard Specialized Funds
Vanguard Dividend Appreciation Index Fund Vanguard Health Care Fund
Vanguard Precious Metals Fund

Vanguard STAR Funds
Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Total International Stock Index Fund

Vanguard Tax-Managed Funds
Vanguard Tax-Managed Balanced Fund

Vanguard Valley Forge Funds
Vanguard Balanced Index Fund

Vanguard Variable Insurance Funds
Total Bond Market Index Portfolio

Vanguard Wellesley Income Fund

Vanguard Wellington Fund

Vanguard Whitehall Funds
Vanguard International Explorer Fund
Vanguard High Dividend Yield Index Fund

Vanguard World Fund
Vanguard Extended Duration Treasury Index Fund Vanguard International Growth Fund

AGREED TO as of ___________________, 2010 BY:

JPMorgan Chase Bank Each Fund listed on Exhibit 1

By:     __________________________              By:     _______________________
Name:   __________________________              Name:   Jean E. Drabick
Title:  __________________________              Title:  Assistant Treasurer


 

VANGUARD ETF SHARES

Authorized Participant Agreement

 

            This Authorized Participant Agreement (the “Agreement”) is entered into by and between Vanguard Marketing Corporation (the “Distributor”) and    __________________                           _______________________ (the “Participant”) and is subject to acceptance by ­­­­____________________, an index receipt agent for the ETF Shares issued by the registered investment companies listed in Annex I to the Agreement.  

 

The Distributor, acting on an agency basis, is the principal underwriter of the class of shares known as “ETF Shares” issued by the registered investment companies listed in Annex I to the Agreement (each, a “Trust”; each series of a Trust, a “Fund”).  The Bank serves as each Trust’s agent to provide certain transfer agency services for the ETF Shares of each Fund; to act as index receipt agent, as such term is defined in the rules of the National Securities Clearing Corporation (“NSCC”); and to provide custody services under the terms of a custody agreement.  The Distributor, Bank, and Participant acknowledge and agree that the Trusts and the Funds listed in Annex I to the Agreement shall be third party beneficiaries of this Agreement and shall receive the benefits contemplated by this Agreement.

 

The process by which a Participant purchases and redeems ETF Shares from a Fund is described in detail in the Fund’s statement of additional information (“SAI”), which is incorporated by reference into the Fund’s ETF Shares prospectus. (Hereafter, the two documents are referred to collectively as the “Prospectus.”).  The discussion of the purchase and redemption process in this Agreement is modified as necessary by reference to the more complete discussion in the SAI.  References to the Prospectus are to the then‑current Prospectus as it may be supplemented or amended from time to time.  Capitalized terms not otherwise defined herein are used herein as defined in the Prospectus.

 

The ETF Shares of a Fund may be purchased or redeemed directly from the Fund only in aggregations of a specified number, known as a “Creation Unit.”  The number of ETF Shares presently constituting a Creation Unit of each Fund is set forth in Annex I.  Creation Units of ETF Shares may be purchased only by or through an “Authorized Participant,” i.e., an entity that is a participant in the Depository Trust Company (“DTC”) and that has entered into an Authorized Participant Agreement with the Distributor.

 

            To purchase a Creation Unit, a Participant generally must deliver to the Fund a designated basket of specified securities (the “Deposit Securities”) and an amount of cash computed as described in the Prospectus (the “Balancing Amount”), plus a purchase transaction fee as described in the Prospectus (the “Transaction Fee”).  The Balancing Amount and the Transaction Fee are referred to collectively as the “Cash Component.”  The Fund may permit or require the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security.  Typically, the Cash Component is paid by the Participant to the Fund.  However, if the Balancing Amount is negative and is larger than the Transaction Fee, then the Cash Component will be paid by the Fund to the Participant.

 

 

 

 

 


 

 

Authorized Participant Agreement

Page 2 of 11

 

            To redeem a Creation Unit, a Participant generally must tender to the Fund the number of Vanguard ETF Shares specified in Annex I.  In return, the Participant will receive a designated basket of securities (the “Redemption Securities”).  The Cash Component of a redemption consists of the Balancing Amount minus the Transaction Fee.  Depending on the amount of the Balancing Amount, the Cash Component may be paid by the Participant to the Fund or vice-versa.

 

            Certain Funds may, in their sole discretion, accept collateral in anticipation of the delivery of all or a portion of the Deposit Securities (in the case of a creation) or Vanguard ETF Shares (in the case of a redemption).  See Annex VI.

 

            This Agreement is intended to set forth the procedures by which the Participant may purchase and/or redeem Creation Units of ETF Shares of those funds whose portfolio securities trade on a U.S securities market (“U.S. Funds”) (i) through the Continuous Net Settlement (“CNS”) clearing processes of NSCC as such processes have been enhanced to effect purchases and redemptions of Creation Units, such processes being referred to herein as the “NSCC Clearing Process,” or (ii) outside the NSCC Clearing Process, such processes being referred to herein as “Outside the NSCC Clearing Process.”  This Agreement also sets forth the procedures by which the Participant may purchase and/or redeem Creation Units of ETF Shares of those Funds whose portfolio securities trade on securities markets outside the United States (the “International Funds”) through the DTC and international subcustodians. The procedures for processing an order to purchase ETF Shares (a “Purchase Order”) and an order to redeem ETF Shares (a “Redemption Order”) are described in the Fund’s Prospectus and in Annex II to this Agreement. 

 

            The parties hereto, in consideration of the premises and of the mutual agreements contained herein, agree as follows:

 

1.  Purchase and Redemption Orders

 

(a)  All Purchase Orders and Redemption Orders shall be made in accordance with the terms of the Prospectus and this Agreement (including the Annexes to this Agreement).  The Funds reserve the right to issue additional or other procedures relating to the manner of purchasing or redeeming Creation Units, and the Participant agrees to comply with such procedures as it may receive from time to time.  It is contemplated that the phone lines used by the Vanguard ETF telephone representatives will be recorded, and the Participant hereby consents to the recording of all calls with these representatives.  The Participant shall be responsible for any and all expenses and costs incurred by a Fund in connection with any Purchase or Redemption Orders.

 

(b)  The Participant acknowledges and agrees that the placement of a Purchase Order or Redemption Order shall be irrevocable.  The Fund and the Distributor on behalf of the Fund reserve the right to reject any Purchase Order, as more fully described in Annex II, and to reject any Redemption Order that is not in “proper form” as described in the SAI. 

 

 

 

 

 


 

 

Authorized Participant Agreement

Page 3 of 11

 

(c)  Each Business Day, as that term is defined in the SAI, the Distributor will make available the names and amounts of Deposit Securities to be included in the creation basket for each Fund on the next Business Day and, if different, the names and amounts of Redemption Securities that a Participant will receive as in-kind redemption proceeds.     Purchase and Redemption Orders may be submitted only on Business Days.

 

(d)  The Participant understands and agrees that residents of Australia and New Zealand are entitled to receive only cash upon redemption of a Creation Unit of Vanguard ETF Shares.  Accordingly, the Participant agrees that it will not tender a redemption request on behalf of a Beneficial Owner who is a resident of Australia or New Zealand.

 

2.  Clear Title to Transferred Securities  

 

(a)  The Participant represents on behalf of itself and any party for which it acts that upon delivery of a portfolio of Deposit Securities to the Bank and/or the relevant sub-custodian, the Fund will acquire good and unencumbered title to such securities, free and clear of all liens, restrictions, charges, duties imposed on the transfer of assets, and encumbrances, and not subject to any adverse claims, including without limitation any restrictions upon the sale or transfer of such securities imposed by (i) any agreement or arrangement entered into by the Participant or any party for which it is acting in connection with a Purchase Order; or (ii) any provision of the 1933 Act, and any regulations thereunder (except that portfolio securities of issuers other than U.S. issuers shall not be required to have been registered under the 1933 Act if exempt from such registration), or of the applicable laws or regulations of any other applicable jurisdiction.  In particular, the Participant represents on behalf of itself and any party for which it acts that no such securities are “restricted securities” as that term is used in Rule 144(a)(3)(i) under the 1933 Act.

 

(b)  The Participant represents and warrants that it will not attempt to place a Redemption Order for the purpose of redeeming any Creation Unit of ETF Shares of any Fund unless it first ascertains that it or any party for which it is acting owns outright or has full legal authority and legal and beneficial right to tender for redemption the requisite number of the Fund’s ETF Shares, and that such ETF Shares have not been loaned or pledged to another party and are not the subject of a repurchase agreement, securities lending agreement, or any other agreement that would preclude the delivery of such ETF Shares to the Fund.  The Participant understands and agrees that in the event ETF Shares (or collateral of equivalent value, if permitted) are not transferred, the Redemption Order trade may be broken by the Fund and the Participant will be solely responsible for all costs incurred by the Fund and/or the Distributor related to breaking the trade.  The Distributor will only process Redemption Orders upon verification from the Bank of the Fund’s receipt of such ETF Shares or collateral.

 

3.  Cash Component

 

The Participant hereby agrees that in connection with a Purchase Order or Redemption Order, whether for itself or any party for which it acts, if the Cash Component is payable to the Fund, it will make available to the issuing Fund in same day funds an amount of cash

 

 

 


 

 

Authorized Participant Agreement

Page 4 of 11

sufficient to pay the Cash Component plus any other amounts of cash due to the Fund in connection with the purchase of any Creation Unit.  Computation of this amount shall exclude any stamp duty and other similar fees and expenses payable upon the transfer of beneficial ownership of securities, which shall be the sole responsibility of the Participant and not of the Fund.  Payment of the Cash Component shall be made to a designated account maintained by the Bank and shall be provided in same day or immediately available funds on or before the “Contractual Settlement Date” (as that term is defined in Annex II to this Agreement).  The Participant hereby agrees to ensure that the Cash Component will be received by the issuing Fund on or before the Contractual Settlement Date, and in the event payment of the Cash Component has not been made by the Contractual Settlement Date, the Participant agrees on behalf of itself and any party for which it acts to pay the amount of the Cash Component, plus interest, computed at such reasonable rate as may be specified by the Fund from time to time.  The Participant shall be liable to the Bank and/or the Fund for any amounts advanced by the Bank in its sole discretion to the Participant for payment of the amounts due and owing for the Cash Component.

 

4.  Corporate Actions

 

Note:  All references to the Participant in this Section 4 should be read to include any party on whose behalf the Participant may be acting in placing a Purchase or Redemption Order.

 

(a)  With respect to any Purchase Order, each Fund acknowledges and agrees to return to the Participant any dividend, distribution, or other corporate action paid to the Fund in respect of any Deposit Security that is transferred to the Fund that, based on the valuation of such Deposit Security at the time of transfer, should have been paid to the Participant.

 

 (b)  With respect to any Redemption Order, the Participant acknowledges and agrees (i) to return to a Fund any dividend, distribution, or other corporate action paid to the Participant in respect of any Redemption Security that is transferred to the Participant that, based on the valuation of such Redemption Security at the time of transfer, should have been paid to the Fund; and (ii) that a Fund is entitled to reduce the amount of money or other proceeds due to the Participant by an amount equal to any dividend, distribution, or other corporate action to be paid to the Participant in respect of any Redemption Security that is transferred to the Participant that, based on the valuation of such Redemption Security at the time of transfer, should be paid to the Fund. 

 

5.  Status of Participant

 

(a)  The Participant hereby represents, covenants, and warrants that it is a participant in the DTC and that, with respect to Purchase Orders or Redemption Orders of Creation Units of ETF Shares of any Fund placed through the NSCC Clearing Process, it is a member of the NSCC and a participant in the CNS System of NSCC.  With respect to Vanguard’s stock ETFs, Purchase Orders and Redemption Orders for Creation Units will settle either through the NSCC Clearing Process or Outside the NSCC Clearing Process.  With respect to Vanguard’s bond ETFs, Purchase Orders and Redemption Orders will settle through the DTC and the Federal Reserve’s Fedwire System.  If a Participant loses its status as a DTC

 

 

 

 


 

 

Authorized Participant Agreement

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participant or NSCC member, or its eligibility to participate in the CNS System, it shall promptly notify the Distributor in writing of the change in status or eligibility, and the Distributor may terminate this Agreement.

 

(b)  The Participant hereby represents and warrants that, unless Section 5(c) is applicable, it is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, is qualified to act as a broker or dealer in the states or other jurisdictions where it transacts business, and is a member in good standing of the Financial Industry Regulatory Authority (”FINRA”) .   The Participant agrees that it will maintain such registrations, qualifications, and membership in good standing and in full force and effect throughout the term of this Agreement.  The Participant agrees to comply with all applicable federal laws, the laws of the states or other jurisdictions concerned, and the rules and regulations promulgated thereunder, and with the Constitution, By-Laws and Rules of FINRA, and that it will not offer or sell ETF Shares of any Fund in any state or jurisdiction where such shares may not lawfully be offered and/or sold.

 

(c)  If the Participant is offering and selling ETF Shares of any Fund in jurisdictions outside the several states, territories and possessions of the United States and is not otherwise required to be registered or qualified as a broker or dealer, or to be a member of FINRA, the Participant nevertheless agrees to observe the applicable laws of the jurisdiction in which such offer and/or sale is made, to comply with the full disclosure requirements of the Securities Act of 1933 as amended (the “1933 Act”) and the regulations promulgated thereunder, and to conduct its business in accordance with the spirit of the FINRA Rules.

 

(d)  The Participant understands and acknowledges that the proposed method by which Creation Units of Vanguard ETF Shares will be created and traded may raise certain issues under applicable securities laws.  For example, because new Creation Units of ETF Shares may be issued and sold by the Fund on an ongoing basis, at any point a “distribution,” as such term is used in the 1933 Act, may occur.  The Participant understands and acknowledges that some activities on its part, depending on the circumstances, may result in its being deemed a participant in the distribution in a manner that could render it a statutory underwriter and subject it to the prospectus delivery and liability provisions of the 1933 Act.  (A fuller discussion of these risks appears in the SAI.)  Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the Participant should consult legal counsel if the Participant is uncertain of its status.  Neither the Distributor nor the Bank will indemnify the Participant for any violations of the federal securities laws committed by the Participant.

 

6.  Role of Participant

 

(a)  The Participant acknowledges and agrees that for all purposes of this Agreement, the Participant will be deemed to be an independent contractor, and will have no authority to act as agent for the Funds or the Distributor in any matter or in any respect.  The Participant agrees to make itself and its employees available upon request during normal business hours to consult with a Fund or the Distributor or their designees concerning the performance of the Participant’s responsibilities under this Agreement.

 

 

 

 


 

 

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 (b)  The Participant acknowledges and agrees that it remains bound by all of the obligations for which it is responsible under this Agreement, even when it is acting on behalf of a third party rather than for its own account.

 

(c)  The Participant agrees to maintain records of all sales of Vanguard ETF Shares made by or through it and to furnish copies of such records to the Fund or the Distributor upon request.

 

7.  Authorized Persons of Participant

 

(a)  Concurrently with the execution of this Agreement, and from time to time thereafter as may be requested by the Funds or the Distributor, the Participant shall deliver to the Distributor, with a copy to the Bank, a certificate in a form approved by the Distributor (see Annex III hereto), signed by the Participant’s Secretary or other duly authorized official, identifying all persons authorized to give instructions or notices on behalf of the Participant in connection with this Agreement (each an “Authorized Person”).  Such certificate may be accepted and relied upon by the Distributor and the Funds as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until delivery of a superseding certificate in a form approved by the Distributor. 

 

(b)  The Participant shall assign a unique personal identification number (“PIN”) to each of its Authorized Persons, which should be kept confidential.  When placing a Purchase Order or Redemption Order with the Distributor, an Authorized Person will be required to provide his or her PIN.

 

(c)  Upon the termination or revocation of authority of any Authorized Person by the Participant, the Participant shall give immediate written notice of such fact to the Distributor and the Funds, with a copy to the Bank, and such notice shall be effective upon receipt by the Distributor and the Funds.

 

(d)  The Distributor and the Funds may assume that all instructions issued to it using a valid and effective PIN have been properly placed by an Authorized Person, unless the Distributor and the Funds have actual knowledge to the contrary.  For purposes of this paragraph, a valid and effective PIN is a PIN assigned to an individual (i) whose authority to act on behalf of the Participant has not been terminated or revoked, or (ii) whose authority has been terminated or revoked, but such termination or revocation has not been communicated to the Distributor or the Funds in accordance with Section 7(c).

 

8.  Marketing Materials and Representations  

 

(a)  The Participant represents, warrants, and agrees that it will not make any representations concerning a Vanguard Fund’s ETF Shares other than those contained in the Fund’s then‑current Prospectus or in any promotional materials or sales literature furnished or approved by the Distributor.  The Participant agrees not to furnish or cause to be furnished to any person or display or publish any information or materials relating to Vanguard ETF

 

 

 

 

 


 

 

Authorized Participant Agreement

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Shares (including, without limitation, promotional materials and sales literature, advertisements, press releases, announcements, statements, posters, signs, or other similar materials), except information and materials furnished to the Participant by the Distributor or approved in writing by the Distributor. 

 

(b)  Notwithstanding the foregoing, the Participant may without the written approval of the Distributor prepare and circulate in the regular course of its business research reports that include information, opinions, or recommendations relating to Vanguard ETF Shares (i) for internal use by the Participant, or (ii) for public dissemination, provided that such research reports compare the relative merits and benefits of Vanguard ETF Shares with other products and are not used for purposes of marketing Vanguard ETF Shares.

 

(c)  The Participant understands and acknowledges that Vanguard ETFs may not be advertised or marketed as “mutual funds” and that any advertising materials must disclose that Vanguard ETF Shares are not individually redeemable and can be redeemed only in Creation Unit-size aggregations.

 

9.  Compliance with Internal Revenue Code Section 351  

 

            The Participant represents and warrants to the Distributor and each Fund that it does not, and will not in the future, hold for the account of any single beneficial owner 80% or more of such relevant Fund, so as to cause the Fund to have a basis in the portfolio securities deposited with the Fund different from the market value of such portfolio securities on the date of the deposit, pursuant to section 351 of the Internal Revenue Code.  The Fund and its transfer agent and Distributor shall have the right to require information from the Participant regarding ownership of Fund shares, and to rely thereon to the extent necessary to make a determination regarding ownership of 80% or more of any Fund by a Beneficial Owner as a condition to the acceptance of a deposit of Deposit Securities.

 

10.  Irrevocable proxy

 

Note:  This section is included to address any potential concerns under section 17(e) of the Investment Company Act.

 

(a)  The Participant agrees that if it beneficially owns 5% or more of the outstanding voting securities of a Fund as of the record date of any meeting at which the Fund’s shareholders will be asked to vote on one or more proposals, it will execute at that time an irrevocable proxy in favor of the Distributor and/or such person or persons whom the Distributor may designate.  The irrevocable proxy shall appoint the Distributor and/or its designees as attorney(s) in fact for the Participant for the sole purpose of voting the Participant’s beneficially owned shares (regardless of class) at such meeting or any adjournment of such meeting.  The Distributor will work with the Participant to determine whether it beneficially owns 5% or more of the shares of any Fund as of a record date.

 

(b)  The Distributor agrees that it will exercise the voting rights delegated to it pursuant to the irrevocable proxy obtained from the Participant by mirror voting, i.e. , by voting (or

 

 

 

 


 

 

Authorized Participant Agreement

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abstaining from voting) the Participant’s beneficially owned Fund shares in the same proportion as the votes (or abstentions) of other holders of the Fund.

 

(c)  Any irrevocable proxy granted by the Participant pursuant to the preceding paragraphs shall terminate with the termination of this Agreement.

 

11.  Indemnification

 

Note:  This section shall survive the termination of this Agreement.

 

(a)  The Participant hereby agrees to indemnify and hold harmless the Distributor, the Funds, the Bank, their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an “Indemnified Party”), from and against any loss, liability, cost, or expense (including attorneys’ fees) incurred by such Indemnified Party as a result of (i) any breach by the Participant of any provision of this Agreement; (ii) any failure on the part of the Participant to perform any of its obligations set forth in the Agreement; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations; or (iv) actions of such Indemnified Party in reliance upon any representations made in accordance with Annexes II, III or V (as each may be amended from time to time) reasonably believed by the Distributor and/or the Bank to be genuine and to have been given by the Participant.  The Participant understands and agrees that the Funds as third party beneficiaries to this Agreement are entitled to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations under this Agreement that benefit the Funds. 

 

(b)  The Distributor hereby agrees to indemnify and hold harmless the Participant, its respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each a “Participant Indemnified Party”), from and against any loss, liability, cost, or expense (including attorneys’ fees) incurred by such Participant Indemnified Party as a result of (i) any breach by the Distributor of any provision of this Agreement; (ii) any failure on the part of the Distributor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and regulations of self-regulatory organizations; (iv) actions of such Participant Indemnified Party in reliance upon any representations made in accordance with Annexes I, II and IV (as each may be amended from time to time) reasonably believed by the Participant to be genuine and to have been given by the Distributor; or (v) any claims by third parties alleging misstatements or omissions in the registration statement for a Fund’s ETF Shares. 

 

(c)  The Participant shall not be liable to the Distributor for any damages arising out of (i) mistakes or errors in data provided in connection with purchase or redemption transactions, except for data provided by the Participant, or (ii) interruptions or delays of communication for any reason between the Participant and the Distributor or any Indemnified Party that is a service provider to the Funds.

 

 

 

 

 


 

 

Authorized Participant Agreement

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(d) The Distributor shall not be liable to the Participant for any damages arising out of (i) mistakes or errors in data provided in connection with purchase or redemption transactions, except for data provided by the Distributor, or (ii) interruptions or delays of communication (x) between the Distributor or any Indemnified Party that is a service provider to the Funds and the Participant, for any reason, or (y) between the Distributor and any other Indemnified Party, if such interruptions or delays are not within the control of the Distributor.

 

12.     Receipt of Prospectus by Participant

13.      

 

The Participant acknowledges receipt of the Prospectus for each of the Funds listed in Annex I and represents that it has reviewed those documents (including the SAI incorporated therein) and understands the terms thereof.

 

13.  Notices  

 

(a)  Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery; by Federal Express or other overnight delivery service; by registered or certified United States first class mail, return receipt requested; or by facsimile with a confirming copy by mail. 

 

(b)  All notices to the respective parties and the Bank shall be to the person and at the address or facsimile number indicated below, or to such other person and at such other address or facsimile number as the parties and the Bank may from time to time designate in accordance with this Section 13.

 

To the Funds or the Funds' Distributor:

 

Name: ETF Counsel

Address: The Vanguard Group, Inc.

   Legal Department, V26

   400 Devon Park Drive

               Wayne, PA 19087

Telephone: 610-503-2398

Facsimile:  610-669-6600

 

 

To the Authorized Participant:

 

Name: _____________________________________

Title: ______________________________________

Address: ___________________________________

               ___________________________________

               ___________________________________

Telephone: _________________________________

Facsimile: __________________________________

 

 


 

 

 

Authorized Participant Agreement

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To the Bank:

 

Name: _____________________________________

Title: ______________________________________

Address: ___________________________________

               ___________________________________

               ___________________________________

Telephone: _________________________________

Facsimile: __________________________________

 

 

14.  Effectiveness, Termination and Amendment of Agreement

 

(a)  This Agreement shall become effective upon execution by both parties and acceptance by the Bank.  This Agreement may be terminated for any reason by either party upon 10 days’ written notice to the other party, and may be terminated immediately by the Distributor in the event of a breach by the Participant of any provision of this Agreement or the procedures described or incorporated herein.  The terms of Section 11 (Indemnification) shall survive the termination of this Agreement.

 

(b)  This Agreement may not be amended, except with the written consent of all parties; provided however, that (i) the Annexes to this Agreement may be amended as set forth in paragraph (c) and (d) of this Section 14, and (ii) any party may designate a new person with new contact information pursuant to Section 13, and such notice will be effective immediately upon receipt by the other party.

 

(c)  The Distributor may amend Annexes I, II, IV, and VI to this Agreement from time to time by delivering a copy of the amendment to the Participant and the Bank in accordance with Section 13.  The amendment will become effective immediately upon receipt.

 

(d)  The Participant may amend Annexes III and V to this Agreement from time to time by delivering a copy of the amendment to the Distributor and the Bank in accordance with Section 13 above.  The amendment will become effective immediately upon receipt.

 

15.  Governing Law  

 

This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York.  The parties irrevocably submit to the non-exclusive jurisdiction of any New York State or United States federal court sitting in New York City over any suit, action or proceeding arising out of or relating to this Agreement.

 

 


 

 

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16.  Counterparts

 

This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date written below.

 

DATED:         _____________________________

 

 

                              VANGUARD MARKETING CORPORATION

                             

By:________________________________________

                                    Title:_______________________________________

                                    Date:_______________________________________

                                    DTC #:_____________________________________

           

                                   

AUTHORIZED PARTICIPANT

 

                                    By:_________________________________________

                                    Title:________________________________________

                                    Date:________________________________________

                                    DTC #:______________________________________

 

 

                                    ACCEPTED BY:

                                    ________________________ , as Bank

 

                        By:__________________________________________

                                    Title:_________________________________________

                                    Date:_________________________________________

                                    DTC #:_______________________________________

 

 


 

 

FIFTH AMENDED AND RESTATED FUNDS’ SERVICE AGREEMENT

 

            This Fifth Amended and Restated Funds’ Service Agreement, made as of the 8 th day of June, 2009 (the “Agreement”), between and among the investment companies registered under the Investment Company Act of 1940 (“1940 Act”), whose names are set forth on the signature page of this Agreement, which together with any additional investment companies which may become a party to this Agreement pursuant to Section 5.4 and 5.5 are collectively called the “Funds”; and The Vanguard Group, Inc., a Pennsylvania corporation (“Service Company”).

            Whereas, each of the Funds has heretofore determined (as evidenced by, among many documents, prior versions * of this Agreement (the “Prior Agreements”), and by prospectuses and proxy statements of the Funds related thereto): (i) to manage and perform the corporate management, administrative and share distribution functions required for its continued operation, (ii) to create a structure which enhances the independence of the Funds from the providers of external services, (iii) to share, on an equitable and fair basis, with all of the other Funds the expenses of establishing the means to accomplish these objectives at the lowest reasonable cost; and

            Whereas, each of the Funds:  (i) has heretofore determined that these objectives can best be accomplished by establishing a company: (a) to be wholly-owned by the Funds; (b) to provide corporate management, administrative, and distribution services, and upon the reasonable request of any Fund to provide other service to such Fund at cost; (c) to employ the executive, managerial, administrative, secretarial and clerical personnel necessary or appropriate to perform such services; and (d) to acquire such assets and to obtain such facilities and equipment as are necessary or appropriate to carry out such services, and to make those assets available to the Funds; and (ii) since May 1, 1975 (or the commencement of its operations after this date) has utilized Service Company, pursuant to the provisions of the Prior Agreements; and

            Whereas, each of the Funds has further heretofore recognized that it may, from time to time, be in the best interests of the Funds (i) for Service Company to provide similar services to investment companies other than the Funds, (ii) for the Funds to organize, from time to time, new investment companies which are intended to become parties to this Agreement; and, (iii) for Service Company to engage in business activities (directly or through subsidiaries), supportive of the Funds’ operations as investment companies; and

            Whereas, each of the Funds desires to enter into a completely integrated Fifth Amended and Restated Funds’ Service Agreement with the other Funds to (i) set forth the current terms and provisions of the relationships which the Funds have determined to establish; and (ii) make non-substantive amendments to the Amended and Restated Funds’ Service Agreement, including correcting the names of the Funds set forth on the signature page of this Agreement.

            Now, Therefore, each Fund agrees with each and all of the other Funds, and with Service Company, as follows:

 

 

 


* Funds’ Service Agreement dated May 1, 1975; an Amended and Restated Funds’ Service Agreement dated October 1, 1977; an Amended and Restated Funds’ Service Agreement dated May 10, 1993, an Amended and Restated Funds’ Service Agreement dated January 1, 1996, and an Amended and Restated Funds’ Service Agreement dated June 15, 2001 as therefore amended.

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I.        CAPITALIZATION AND ASSETS OF SERVICE COMPANY

 

1.1 Capital and Assets.  To provide the Service Company with the cash and with the office space, facilities and equipment necessary for it to discharge its responsibilities hereunder, each Fund agrees:

A.   To make cash investments in the Service Company as provided in Sections 1.2, 1.3 and 1.4.

B.    To assign and transfer to Service Company on and after May 1, 1975 any and all right, title and interest which the Funds may have in any office facilities and equipment necessary for it to discharge its responsibilities and in any other assets which Service Company may develop or acquire, subject only to the rights reserved in Section 1.6 (concerning certain major assets).  Section 5.2 (concerning rights upon withdrawal) and Section 5.3 (concerning rights upon termination) of the Agreement.

1.2 Cash Investments in Service Company.   To provide Service Company with such cash as may be necessary or appropriate from time to time to accomplish the purposes of the Funds and to discharge its responsibilities hereunder, each Fund agrees to purchase, for cash, shares of common stock of Service Company (“Shares”) or such other securities of Service Company (hereafter referred to as “other securities”) upon the favorable vote of the holders of a majority of the Shares adopting a resolution setting forth the terms and provisions of the purchase.  Provided, however, that:

A.   Without the consent of all of the Funds, the date for the purchase of Shares or other securities shall not be less than 15 days following the date on which the resolution is approved by the shareholders.

B.    The cash purchase price to be paid by any Fund for the Shares or other securities, expressed as a percentage of the total purchase price for the additional securities to be paid by all of the Funds shall not exceed the percentage which the then current net assets of the Fund bears to the aggregate current net assets of all of the Funds as of the most recent month-end preceding the purchase date.

1.3 Periodic Adjustments of Cash Investments.  To maintain and re-establish periodically a fair and proportionate ratio of cash investments by each Fund in the Service Company as compared to its then current net assets, each Fund agrees to purchase from one or more of the other Funds, or to sell one or more of the Funds, sufficient Shares or other securities to re-establish the ratio.

A.   Such purchases and sales shall be made (1) as of the last business day of any month upon the addition or withdrawal of any Fund as a party to this Agreement, provided that if the addition or withdrawal of a Fund creates no material disparity in the ratios (as determined by the Service Company’s Board of Directors), and no Fund requests that an adjustment be made, the adjustment may be deferred until the close of the Service Company’s fiscal year; (2) in connection with additional investments pursuant to Section 1.2; and (3) annually as of the close of the Service Company’s fiscal year, on a date fixed by Service Company’s Board of Directors within 90 days after the close of the fiscal year unless there is no material disparity in the ratios (as determined by the Service Company’s Board of Directors) and no Fund requests that an adjustment be made.

B.    The cash purchases and sale price of the Share or other securities shall be for each Fund (1) in the case of Shares, the fair market value of Shares determined in accord with generally accepted accounting principles and procedures established by the Board of Directors of Service Company; and (2) in the case of debt securities, the face value thereof.

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C.    Unless specifically required by applicable law, the issuance and transfer of Shares or other securities of Service Company, and the cash investments of the Funds in Service Company, may be evidenced by proper records of Service Company; and no certificates need be issued.

1.4 Limitation Upon Funds’ Obligations to Make Cash Investments or Purchases.  Notwithstanding the provisions of Sections 1.1, 1.2 and 1.3 above, no Fund shall be obligated to purchase Shares or other securities of Service Company if, as a result of such purchase the Fund would thereby have invested in cash a total of more than 0.40% of its then current net assets in Shares or other securities of Service Company.

1.5 Restrictions on Transfer of Shares or Other Securities.    Each Fund agrees that it will not, without the written consent of all other parties to this Agreement, transfer or dispose of or encumber any of its Shares or other securities of Service Company except as provided in this Agreement, and that, if issued, each certificate for Shares or other securities of Service Company will be stamped with a legend referring to this restriction.

1.6 Assets of Service Company.         The Funds agree that Service Company may acquire, by purchase or lease, office space, furniture, equipment, supplies, files, records, computer hardware and software, and other assets necessary or appropriate for the discharge of the Service Company’s responsibilities hereunder.  Each of the Funds hereby assigns and transfers to Service Company, any and all right, title and interest that it may have or hereafter acquire in any such assets, subject to the rights of each Fund (A) to receive the then fair value of such assets upon the purchase or sale of Shares pursuant to this Agreement, (B) to the continued use of such assets in the administration of the business affairs of a Fund so long as the Fund remains a party to this Agreement.

1.7 Borrowing by Service Company.    The Funds agree that Service Company may borrow money, and may issue a note or other security in connection with such borrowing, as long as such borrowing, is in connection with the discharge of Service Company’s responsibilities hereunder and is undertaken in accord with procedures approved by the Service Company’s Board of Directors.

 

II.   SERVICES TO BE OBTAINED INDEPENDENTLY BY EACH FUND

 

2.1 Services and Expenses.     Each Fund shall, at its own expense, obtain from Service Company or an outside vendor (as that Fund’s Board of Trustees shall determine):

A.   Services of an independent public accountant.

B.    Services of outside legal counsel.

C.    Transfer agency services, including “shareholder services.”

D.   Custodian, registrar and dividend disbursing services.

E.    Brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for its investment portfolio.

F.     Investment advisory services.

G.   Taxes and other fees applicable to its operations.

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H.   Costs incident to its annual or special meetings of shareholders, including but not limited to legal and accounting fees, and the preparations, printing and mailing of proxy materials.

I.      Trustees’ fees.

J.      Costs incurred in the continued maintenance of its corporate existence, including reports to shareholders and government agencies, and the expenses, if any, attributable to the registration of the Fund’s shares with Federal and state regulatory authorities.

K.   And, in general and except as provided in Section 3.2(B), any other costs directly attributable to and identified with a particular Fund or Funds rather than all Funds which are parties to this Agreement.

2.2 Disbursement of Payment for These Services.   Notwithstanding the provisions of Section 2.1 above, Service Company may, as agent for any Fund, disburse to third parties payments for any of the foregoing services or expenses.  Each Fund shall reimburse Service Company promptly for such disbursements made on behalf of the Fund.

                       

III. SERVICES PROVIDED BY AND EXPENSES OF SERVICE COMPANY

 

3.1 Services to be Provided to Funds.              Service Company shall with respect to each Fund, subject to the direction and control of the Board of Trustees and officers of the Fund:

A.   Manage, administer and/or conduct the general business activities of the Fund.

B.    Provide the personnel and obtain the office space, facilities and equipment necessary to perform such general business activities under the direction of the Funds’ executive officers (who may also be officers of Service Company) who will have the full responsibility for the general management of these functions.

C.    Establish wholly-owned subsidiaries, and supervise the management and operations of such subsidiaries, as are necessary or appropriate to carry on or support the business activities of the Fund; and authorize such subsidiaries to perform such other functions for the Fund, including organizing new investment companies which are intended to become parties to this Agreement pursuant to Section 5.4 or Section 5.5, as Service Company’s Board of Directors shall determine. 

No provisions hereof shall prohibit the Service Company from performing such additional services to the Fund as the Fund’s Board of Trustees may appropriately request and which two-thirds of the shareholders of the Service Company shall approve.

3.2 Expenses of Operation of Service Company.  Each of the Funds agrees to pay to the Service Company, within 10 days after the last business day of each month or at such other time as agreed to by the Fund and the Service Company, the Fund’s portion of the actual costs of operation of Service Company for each monthly period, or for such other period as is agreed upon, during which the Fund is a party to this Agreement.

            A.  Corporate Management and Administrative Expenses.  A Fund’s portion of the cost of operation of Service Company shall mean its share of the direct and indirect expenses of Service Company’s providing corporate management and administrative services, including distribution services of an administrative nature, as allocated among the Funds with Allocation of indirect costs based on one or more of the following methods of allocation:

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(1)   Net Assets:  The proportionate allocation of expenses based upon the value of each Fund’s net assets, computed as a percentage of the value of total net assets of all Funds receiving services from Service Company, determined at the end of the last preceding monthly period.

(2)   Personnel Time:  The proportionate allocation of expenses based upon a summary by each Fund of the time spent by each employee who works directly on the affairs of one or more of the Funds, computed as a percentage of the total time spent by such employee on the affairs of all of the Funds.

(3)   Shareholder Accounts:  The proportionate allocation of expenses based upon the number of each Fund’s shareholder accounts and transaction activity in those accounts, measured over a period of time, relative to the total number of shareholder accounts and transaction activity in those accounts for all Funds receiving number of portfolio transactions for all Funds receiving services from the Service Company during such period.

(4)   Such other methods of allocation as may be approved by the Board of Directors of the Service Company based upon its determination that the allocation method is fair to each Fund in view of (i) the nature, amount and purpose of the expenditure, (ii) the benefits, if any, to be derived directly by each Fund relative to the benefits derived by other Funds, (iii) the need or desirability for the Funds as a group to provide competitive investment programs and services at competitive prices for the group to survive and grow, (iv) the benefits which each Fund derives by being a member of a strong Fund group, and (v) such other factors as the Board considers relevant to the specific expenditure and allocation.

B.    Distribution Expenses. Each of the Funds expressly agrees to pay to Service Company, as requested, the Fund’s portion of the actual cost of distributing shares of the Funds, which shall mean its share of all of the direct and indirect expenses of a marketing and promotional nature including, but not limited to, advertising, sales literature, and sales personnel, as well as expenditures on behalf of any newly organized registered investment company which is to become a party of this Agreement pursuant to Section 5.4. The cost of distributing shares of the Funds shall not include distribution-related expenses of an administrative nature, which shall be allocated among the Funds pursuant to Section 3.2(A). Distribution expenses of a marketing and promotional nature shall be allocated among the Funds in the manner approved by the Securities and Exchange Commission in Investment Company Act Release No. 11645 (Feb. 25, 1981):

(1)   50% of these expenses will be allocated based upon each Fund’s average month-end assets during the preceding quarter relative to the average month-end assets during the preceding quarter of the Funds as a group.

(2)   50% of these expenses will be allocated initially among the Funds based upon each Fund’s sales for the 24 months ended with the last day of the preceding quarter relative to the sales of the Funds as a group for the same period. (Shares issued pursuant to a reorganization shall be excluded from the sales of a Fund and the Funds as a group.)

(3)   Provided, however, that no Fund’s aggregate quarterly contribution for distribution expenses, expressed as a percentage of its assets, shall exceed 125% of the average expenses for the Funds as a Group, expressed as a percentage of the total assets of the Funds. Expenses not charged to a particular Fund(s) because of this 125% limitation shall be reallocated to other Funds on iterative basis; and that no Fund’s annual expenses for distribution shall exceed 0.2% of its average month-end net assets.

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IV. CONCERNING THE SERVICE COMPANY

 

4.1 Name.   Each Fund acknowledge and agrees:

A.   That the name “The Vanguard Group, Inc.”, and any variants thereof used to identify (1) the Funds as a group, (2) any Fund as a member of a group being served by Service Company, or (3) any other person as being served or related to Service Company (whether now in existence or hereafter created), shall be the sole and exclusive property of Service Company, its affiliates, and its successors.

B.    That Service Company shall have the sole and exclusive right to permit the use of said name or variants thereof so long as this Agreement or any amendments thereto are effective.

C.    That upon its withdrawal from this Agreement and upon the written request of Service Company, the Fund shall cease to use, or in any way to refer to itself as related to, “The Vanguard Group, Inc.” or any variant thereof.

The foregoing agreements on the part of each Fund are hereby made binding upon it, its trustees, officers, shareholders and creditors and all other persons claiming under or through it.

4.2 Services to Others.  The Service Company may render services to any person other than the Funds so long as:

A.   The services to be rendered to the Funds hereunder are not impaired thereby.

B.    The terms and provisions upon which the services are to be rendered have been approved by the holders of a majority of the Shares.

C.    The services rendered for compensation and, to the extent achievable, for the purpose of gaining a profit thereon.

D.   Any income earned and fees received by Service Company shall be used to reduce the total costs and expenses of Service Company.

4.3 Books, Records, and Audits of Service Company.  The Service Company, and any subsidiary established pursuant to Section 3.1(C), shall maintain complete, accurate, and current books, records, and financial statements concerning its activities. To the extent appropriate, it will preserve said records in the manner and for the periods prescribed by law. Financial records and statements shall be kept in accord with generally accepted accounting principles and shall be audited at least annually by independent public accountants (who may also be accountants for any of the Funds). Within 120 days after the close of Service Company’s fiscal year, it shall deliver to each Fund a copy of its audited financial statements for that year and the accountants report thereon. Service Company, on behalf of itself and any subsidiary, acknowledges that all of the records they shall prepare and maintain pursuant to this Agreement shall be the property of the Funds and that upon a request of any Fund they shall make the Fund’s records available to it, along with such other information and data as are reasonably requested by the Fund, for inspection, audit or copying, or turn said records over to the Fund.

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4.4  Indemnification.

A.   Each Fund (herein the “Indemnitor”) agrees to indemnify, hold harmless, and reimburse (herein “indemnify”) every other Fund, Service Company and/or any subsidiary of Service Company (herein the “Indemnitee”):

(1)   which Indemnitee (a) was or is a party to, or is threatened to be made a party to, any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (herein a “suit”), or (b) incurs an actual economic loss or expense (herein a “loss”).

(2)   if: (a) such suit or loss arises from an action or failure to act, event, occurrence, transaction, or other analogous happening (herein an “event”) under circumstances in which the Indemnitee is involved in a suit or incurs a loss.

(i)    as a result substantially of, or attributable primarily to, its being a party to this Agreement, or to its indirect participation in transactions contemplated by this Agreement; and

(ii)   where the suit or loss arises primarily and substantially from an event related primarily and substantially to the business and/or operations of the Indemnitor; and

(b)   an independent third party, who may but need not be legal counsel for the Funds, advises the Funds in writing (i) that the condition set forth in “(1)” and “(2)(a)” have occurred and (ii) that the Indemnitee is without significant fault or responsibility for the suit or loss as measured by the comparative conduct of the Indemnitor and Indemnitee and by the purposes sought to be accomplished by this Agreement.

B.    The financial obligations of the Indemnitor under this Section shall be limited to:

(1)   In the case of a suit, to expenses (including attorneys’ fees), actually incurred by the Indemnitee. The termination of any suit by judgment, order, settlement, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee is not entitled to be indemnified hereunder.

(2) In the case of an event, to losses and/or expenses (including attorney’s fees) actually incurred by the Indemnitee.

The Indemnitee shall not be liable financially hereunder for lost profits in the case of either a suit or loss.

C.    Expenses incurred in defending a suit or resolving an event may be paid by the prospective Indemnitor in advance of the final disposition of such suit or event if authorized by the Board of Trustees of the prospective Indemnitor in the specific case upon receipt of an undertaking by or on behalf of the prospective indemnitee to repay such amount unless it shall ultimately be determined that the Indemnitee is entitled to be indemnified by the Indemnitor as provided in this Section.

D.   The indemnification provided by this section shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under any agreement or otherwise.

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V.   TERM OF AGREEMENT

 

5.1 Effective Period.   This Agreement shall become effective on the date first written above, and shall continue in full force and effect as to all parties hereto until terminated or amended by mutual agreement of all parties hereto.  The withdrawal pursuant to Section 5.2(A) or 5.2(B) of one or more of the Funds from this agreement shall not affect the continuance of this Agreement except as to the parties withdrawing.

5.2 Withdrawal from Agreement.

A.   Any Fund may elect to withdraw from this Agreement effective at the end of any monthly period by giving at least 90 days’ prior written notice to each of the parties to this Agreement.  Upon the written demand of all other Funds which are parties to this Agreement a Fund shall withdraw, and in the event of its failure to do so shall be deemed to have withdrawn, from this Agreement; such demand shall specify the date of withdrawal which shall be at the end of any monthly period at least 90 days from the time of service of such demand.

B.    In the event of the withdrawal of any Fund from this Agreement, all its rights and obligations, except for lease commitments, under this Agreement (except such rights or obligations as have accrued prior to the date of withdrawal) shall terminate as of the date of the withdrawal.  The withdrawing Fund shall surrender its Shares to Service Company, and (1) shall be entitled to receive from Service Company an amount equal to the excess of the fair value of (i) its Shares of other securities Service Company as of the date of its withdrawal less (ii) its proportionate interest in any liabilities of Service Company, including when appropriate any commitments of Service Company and unexpired leases at the date of withdrawal; (2) shall be obligated to pay Service Company an amount equal to the excess of (ii) over (i).  Such amount to be received from or paid to Service Company shall be determined by the favorable vote of the holders of a majority of the Shares whose determination shall be conclusive upon the Funds.  Any amount found payable by the Service Company to the withdrawing Fund shall be recoverable by Service Company from the Funds remaining under this Agreement in accordance with the provisions of Section 1.2, 1.3 and 1.4 hereof.

5.3  Termination by Mutual Consent.   In the event that all Funds withdraw from this Agreement without entering into a comparable successor agreement, each Fund shall surrender its Shares to Service Company and after payment by Service Company of all its liabilities, including the settlement of unexpired lease obligations, shall:

A.   Receive from Service Company in cash an amount equal to its proportionate share of the actual value of all assets of the Service Company which can be reduced readily to cash.

B.    Negotiate in good faith with the other Funds provision for the equitable use and/or disposition of assets of the Service Company which are not readily reducible to cash.

5.4 Additional Parties to Agreement. Upon the favorable vote of two-thirds of the shareholders and of the holders of two-thirds of the Shares of the Service Company, any investment company registered under the Investment Company Act of 1940 may become a party to this Agreement and share as a Fund in all of the rights, duties and liabilities hereunder by adopting, executing and delivering to the Service Company and the Funds a signed copy of this Agreement which shall evidence that investment company’s agreement to assume the duties and obligations of a Fund hereunder.  Upon the delivery of a signed copy of this Agreement, the new Fund shall be subject to all provisions of this Agreement and become a holder of Shares by adjustment in cash investments among the Funds pursuant to Section 1.3.  No person shall become a holder of shares without becoming a party to this Agreement.

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5.5 Fund of Funds Parties to Agreement. A “Fund of Funds” shall mean a registered investment company or series of a Fund which is managed and administered by Service Company and which invests substantially all of its assets in shares of two or more Funds (or series thereof).

A.  Upon the favorable vote of two-thirds of the shareholders and of the holders of two-thirds of the Shares of the Service Company, a Fund of Funds organized as a separate registered investment company may become a party to this Agreement and share as a Fund in all of the rights, duties and liabilities hereunder by adopting, executing and delivering to the Service Company and the Funds a signed copy of this Agreement which shall evidence that investment company’s agreement to assume the duties and obligations of a Fund hereunder, except as provided in the following paragraph B.

B.  A Fund of Funds:  (1) shall not be obligated or permitted to make a capital contribution or to acquire Shares pursuant to Section I except to the extent that the Fund of Funds’ assets are not invested in shares of the Funds; (2) shall not be allocated or obligated to pay any portion of the expenses of Service Company pursuant to Section 3.2 except as determined by the Board of Directors of Service Company pursuant to Section 3.2(A)(4); and (3) may have the expenses the Fund of Funds would otherwise bear pursuant to Section 2.1 reduced or eliminated by the savings which accrue to the benefit of the Funds.

C.  Upon the delivery of a signed copy of this Agreement, the Fund of Funds shall be subject to all the provisions of this Agreement except as provided herein.

 

VI. GENERAL

 

6.1 Definition of Certain Terms.  As used in this Agreement, the terms set forth below shall mean:

A.   “Fair Value of Shares” shall mean the proportionate interest, as represented by the ratio of the number of Shares owned by a Fund to the number of Shares issued and outstanding, in all assets of the Service Company less all liabilities of the Service Company on the date fair value is to be determined.  Assets shall be valued at fair market value.  In case of any dispute as to the proportionate interest of any Fund or as to the fair value of the Shares, the issue shall be determined by the favorable vote of the holders of a majority of the Shares, whose determination shall be conclusive upon the Fund.

B.    “Person” shall mean a natural person, a corporation, a partnership, an association, a joint-stock company, a trust, a fund or any organized group of persons whether incorporated or not.

6.2 Assignment.  This Agreement shall bind and inure to the benefit of the parties thereto, their respective successors and assigns.

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6.3 Captions.   The captions in this Agreement are included for convenience of reference only and in no way define any of the provisions hereof or otherwise affect their construction or effect.

6.4 Amendment. Unless prohibited by applicable laws, regulations or orders of regulatory authorities and except as set forth below, this Agreement may be amended at any time and in one or more respects upon the favorable vote of the holders of a majority of the Shares (except that the vote required in Sections 3.1 and 5.4 may be amended only by the favorable votes of the number of holders or Shares specified therein) and without the further approval or vote of shareholders of any of the Funds; provided, however, that Section 1.4 (limiting cash investments by the Funds in Service Company) may not be amended unless and exemptive order permitting such amendment is obtained from the U.S. Securities and Exchange Commission.

6.5 Severability.  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.

            In Witness Whereof, each of the parties hereto has caused the Agreement to be signed and its corporate seal to be hereto affixed by its proper officers thereunto duly authorized, all as of the date and year first above written.

 

 

 

 

 

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The Vanguard Group, Inc.     

 

 

Attest: _____________________                  BY: ___________________________

            Heidi Stam                                                 F. William McNabb

Secretary                                                    President and

       Chief Executive Officer

 

The Vanguard Group of Investment Companies:  

 

Vanguard Admiral Funds                               Vanguard Bond Index Funds            

Vanguard California Tax-Free Funds             Vanguard Chester Funds                   

Vanguard Convertible Securities Fund          Vanguard Explorer Fund                   

Vanguard Fenway Funds                               Vanguard Fixed Income Securities Funds

Vanguard Florida Tax-Free Funds                 Vanguard Horizon Funds                  

Vanguard Index Funds                                   Vanguard International Equity Index Funds

Vanguard Malvern Funds                               Vanguard Massachusetts Tax-Exempt Funds

Vanguard Money Market Reserves                Vanguard Montgomery Funds          

Vanguard Morgan Growth Fund                    Vanguard Municipal Bond Funds     

Vanguard New Jersey Tax-Free Funds          Vanguard New York Tax-Free Funds           

Vanguard Ohio Tax-Free Funds                     Vanguard Pennsylvania Tax-Free Funds

Vanguard Quantitative Funds                                    Vanguard Scottsdale Funds 1

Vanguard Specialized Funds                          Vanguard STAR Funds                     

Vanguard Tax-Managed Funds                      Vanguard Trustees’ Equity Fund      

Vanguard Valley Forge Funds                       Vanguard Variable Insurance Funds 

Vanguard Wellesley Income Fund                 Vanguard Wellington Fund               

Vanguard Whitehall Funds                             Vanguard Windsor Funds                 

Vanguard World Fund                                  

 

 

Attest: _____________________                  BY: ___________________________

            Heidi Stam                                                 F. William McNabb

Secretary                                                    President and

       Chief Executive Officer

 

Signature page revised as of October 16, 2009.

 

 

 

1 Formerly Vanguard Treasury Fund.



 


 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 56 to the Registration Statement on Form N-1A (the “Registration Statement”) of our reports dated February 8, 2011, relating to the financial statements and financial highlights appearing in the December 31, 2010 Annual Reports to Shareholders of Vanguard Total Bond Market Index Fund, Vanguard Short-Term Bond Index Fund, Vanguard Intermediate-Term Bond Index Fund, Vanguard Long-Term Bond Index Fund, and Vanguard Inflation-Protected Securities Fund (comprising Vanguard Bond Index Fund), and of our report dated February 14, 2011, relating to the financial statements and financial highlights appearing in the December 31, 2010 Annual Report to the Shareholders of Vanguard Total Bond Market II Index Fund, which reports are also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading “Financial Highlights” in the Prospectuses and under the headings “Financial Statements” and “Service Providers—Independent Registered Public Accounting Firm” in the Statement of Additional Information.

PricewaterhouseCoopers LLP
Philadelphia, PA
April 20, 2011


 

VANGUARD FUNDS
MULTIPLE CLASS PLAN

I. INTRODUCTION

      This Multiple Class Plan (the “Plan”) describes six separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the “Funds,” individually a “Fund”). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes.

      The Plan has been approved by the Board of Directors of The Vanguard Group (“Vanguard”). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time.

II. SHARE CLASSES

A Fund may offer any one or more of the following share classes:

Investor Shares
AdmiralShares
SignalShares
Institutional Shares
Institutional Plus Shares
ETF Shares

III. DISTRIBUTION, AVAILABILITY AND ELIGIBILITY

      Distribution arrangements for all classes are described below. Vanguard retains sole discretion in determining share class availability, and whether Fund shares shall be offered either directly or through certain financial intermediaries, or on certain financial intermediary platforms. Eligibility requirements for purchasing shares of each class will differ, as follows:

A. Investor Shares

      Investor Shares generally will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for

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Investor Shares will be substantially lower than the amount required for any other class of shares.

B. Admiral Shares

      Admiral Shares generally will be available to individual and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may include, but are not limited to the following factors: (i) the total amount invested the Fund; or (ii) any other factors deemed appropriate by a Fund’s Board of Trustees.

C. Signal Shares

      Signal Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that Signal Shares will be offered to Vanguard’s institutional clients according to eligibility criteria deemed appropriate by the Fund’s Board of Trustees.

D. Institutional Shares

      Institutional Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount per account for Institutional Shares will be substantially higher than the amounts required for Investor Shares, Admiral Shares or Signal Shares.

E. Institutional Plus Shares

      Institutional Plus Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Plus Shares will be substantially higher than the amount required for any other class of the Fund’s shares.

F. ETF Shares

      The Fund will sell ETF Shares to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their ETF shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund’s distributor. Additional eligibility requirements may be specified in Schedule B hereto, as such Schedule may be

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amended from time to time. Investors who are not Authorized Participants may buy and sell ETF shares through various exchanges and market centers.

IV. SERVICE ARRANGEMENTS

      All share classes will receive a range of services provided by Vanguard on a per account basis. These “account-based” services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows:

A. Investor Shares

      Investor Shares generally will receive the most basic level of service from Vanguard. Investor Shares generally will be serviced through a pool of Vanguard client service representatives.

B. Admiral Shares

      Admiral Shares will receive a different level of service from Vanguard as compared to Investor Shares. Special client service representatives may be assigned to service Admiral Shares, and holders of such shares may from time to time receive special mailings and unique additional services.

C. Signal Shares

      Signal Shares will receive a level of service from Vanguard that differs from the service provided to the holders of shares of other classes. Such services may include informational newsletters and other similar materials devoted to investment topics of interest. Such newsletters or other materials may be mailed on a periodic basis. These newsletters or other materials may also be available to Signal shareholders through separate electronic venues including a dedicated web site. In addition, special client service representatives may be assigned to service Signal Shares.

D. Institutional Shares

      Institutional Shares will receive from Vanguard a level of service that differs from the service provided to the holders of shares of other classes. Such services may include special client service representatives who will be assigned to service Institutional Shares. Most holders of Institutional Shares periodically will

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receive special investment updates from Vanguard’s investment staff. Holders of Institutional Shares also may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation’s FundSERV system and other special servicing platforms for institutional investors.

E. Institutional Plus Shares

      Institutional Plus Shares generally will receive a very high level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Plus Shares, and most holders of such shares periodically, but more than the holders of all other shares, will receive special updates from Vanguard’s investment staff. Holders of Institutional Plus Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation’s FundSERV system and other special servicing platforms for institutional investors. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Institutional Plus Shares

F. ETF Shares

      A Fund is expected to maintain only one shareholder of record for ETF Shares DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, ETF Shares will not receive any special updates from Vanguard’s investment staff.

V. CONVERSION FEATURES

A. Self-Directed Conversions

      1. Conversion into Investor Shares, Admiral Shares, Signal Shares, Institutional Shares, and Institutional Plus Shares.

Shareholders may conduct self-directed conversions from one share class into another share class for which they are eligible. Self-directed conversions may be initiated by the shareholder; however, depending upon the particular share class and the complexity of the shareholder’s accounts, such conversions may require the assistance of a Vanguard representative. Shareholders may convert from one share class into another share class provided that following the conversion the shareholder: (i) meets the then applicable eligibility requirements for the share class into which they are converting; and (ii) receives services consistent with such new share class. Any such conversion will occur at the respective net asset values of the

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share classes next calculated after Vanguard’s receipt of the shareholder’s request in good order.

      2. Conversion into ETF Shares. Except as otherwise provided, a shareholder may convert Investor Shares, Admiral Shares, Signal Shares or Institutional Shares into ETF Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the shareholder will hold ETF Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the shareholder’s request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. None of the Funds that are series of Vanguard Bond Index Funds (see Schedule A) shall permit holders of Investor Shares, Admiral Shares, Signal Shares or Institutional Shares to convert those shares into ETF Shares.

B. Automatic Conversions

      1. Automatic conversion into Admiral Shares. Vanguard may automatically convert Investor Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s conversion without the imposition of any charge. Such automatic conversions may occur on a periodic, or one-time basis. Automatic conversions may occur at different times due to the differing mechanisms through which an account is funded or meets the required investment minimum. Automatic conversions do not apply to certain types of accounts (e.g., accounts held through certain intermediaries, or other accounts as may be excluded by Vanguard management).

      2. Automatic conversion into Signal Shares, Institutional Shares or Institutional Plus Shares. Vanguard may conduct automatic conversions of any share class into either Signal Shares, Institutional Shares, or Institutional Plus Shares in accordance with then-current eligibility requirements. If a Fund offers Signal Shares, the Admiral Shares and Investor Shares of that Fund held by certain institutional clients also may be automatically converted into Signal Shares to align the share class eligibility requirements.

C. Involuntary Conversions and Cash Outs

      1. Cash Outs. If a shareholder in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out

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the shareholder’s remaining account balance. Any such cash out will be preceded by written notice to the shareholder and will be subject to the Fund’s normal redemption fees, if any.

      2. Conversion of Admiral Shares, Signal Shares, Institutional Shares, and Institutional Plus Shares. If a shareholder no longer meets the eligibility requirements for the share class currently held, the Fund may convert the shareholder’s holdings into the share class for which such shareholder is eligible. Any such conversion will be preceded by written notice to the shareholder, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.

VI. EXPENSE ALLOCATION AMONG CLASSES

A. Background

      Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a Funds’ Service Agreement between itself and the Funds (the “Agreement”), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission (“Exemptive Orders”). Vanguard’s direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement.

B. Class Specific Expenses

      1. Expenses for Account-Based Services. Expenses associated with Vanguard’s provision of account-based services to the Funds will be allocated among the share classes of each Fund on the basis of the amount incurred by each such class as follows:

      (a) Account maintenance expenses. Expenses associated with the maintenance of investor accounts will be proportionately allocated among each Fund’s share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class.

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(b) Expenses of special servicing arrangements.

Expenses relating to any special servicing arrangements for a specific class will be proportionally allocated among each eligible Fund’s share classes primarily based on their percentage of total shareholder accounts receiving the special servicing arrangements.

(c) Literature production and mailing expenses.

Expenses associated with shareholder reports, proxy materials and other literature will be allocated among each Fund’s share classes based upon the number of such items produced and mailed for each class.

      2. Other Class Specific Expenses. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class.

C. Fund-Wide Expenses

      1. Marketing and Distribution Expenses. Expenses associated with Vanguard’s marketing and distribution activities will be allocated among the Funds and their separate share classes according to the “Vanguard Modified Formula,” with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund’s Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940.

      2. Asset Management Expenses. Expenses associated with management of a Fund’s assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund’s share classes on the basis of their relative net assets.

      3. Other Fund Expenses. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets.

VII. ALLOCATION OF INCOME, GAINS AND LOSSES

      Income, gains and losses will be allocated among each Fund’s share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time.

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VIII. VOTING AND OTHER RIGHTS

      Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan.

IX. AMENDMENTS

      All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard.

Original Board Approval: July 21, 2000
Last Approved by Board: November 19, 2010

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SCHEDULE A
to
VANGUARD FUNDS MULTIPLE CLASS PLAN

 

Vanguard Fund Share Classes Authorized
 
Vanguard Admiral Funds  
Admiral Treasury Money Market Fund Investor
S&P 500 Value Index Fund Institutional, ETF
S&P 500 Growth Index Fund Institutional, ETF
S&P MidCap 400 Index Fund Institutional, ETF
S&P MidCap 400 Value Index Fund Institutional, ETF
S&P MidCap 400 Growth Index Fund Institutional, ETF
S&P SmallCap 600 Index Fund Institutional, ETF
S&P SmallCap 600 Value Index Fund Institutional, ETF
S&P SmallCap 600 Growth Index Fund Institutional, ETF
 
Vanguard Bond Index Funds  
Short-Term Bond Index Fund Investor, Admiral, Signal, ETF
Intermediate-Term Bond Index Fund Investor, Admiral, Signal, Institutional, ETF
Long-Term Bond Index Fund Investor, Institutional, ETF
Total Bond Market Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
Total Bond Market II Index Fund Investor, Institutional,
Inflation-Protected Securities Fund Investor, Admiral, Institutional
 
Vanguard California Tax-Free Funds  
Tax-Exempt Money Market Fund Investor
Intermediate-Term Tax-Exempt Fund Investor, Admiral
Long-Term Tax-Exempt Fund Investor, Admiral
 
Vanguard Chester Funds  
PRIMECAP Fund Investor, Admiral
Target Retirement Income Fund Investor
Target Retirement 2005 Fund Investor
Target Retirement 2010 Fund Investor
Target Retirement 2015 Fund Investor
Target Retirement 2020 Fund Investor
Target Retirement 2025 Fund Investor
Target Retirement 2030 Fund Investor
Target Retirement 2035 Fund Investor
Target Retirement 2040 Fund Investor
Target Retirement 2045 Fund Investor
Target Retirement 2050 Fund Investor
Target Retirement 2055 Fund Investor
 
Vanguard Convertible Securities Fund Investor

 

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Vanguard Fund Share Classes Authorized
 
Vanguard Explorer Fund Investor, Admiral
 
Vanguard Fenway Funds  
Equity Income Fund Investor, Admiral
Growth Equity Fund Investor
PRIMECAP Core Fund Investor
 
Vanguard Fixed Income Securities Funds  
Short-Term Treasury Fund Investor, Admiral
Short-Term Federal Fund Investor, Admiral
Short-Term Investment-Grade Fund Investor, Admiral, Institutional
Intermediate-Term Treasury Fund Investor, Admiral
Intermediate-Term Investment-Grade Fund Investor, Admiral
GNMA Fund Investor, Admiral
Long-Term Treasury Fund Investor, Admiral
Long-Term Investment-Grade Fund Investor, Admiral
High-Yield Corporate Fund Investor, Admiral,
 
Vanguard Florida Tax-Free Funds  
Florida Long-Term Tax-Exempt Fund Investor, Admiral
 
Vanguard Horizon Funds  
Capital Opportunity Fund Investor, Admiral
Global Equity Fund Investor
Strategic Equity Fund Investor
Strategic Small-Cap Equity Fund Investor
 
Vanguard Index Funds  
500 Index Fund Investor, Admiral, Signal, ETF
Extended Market Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
Growth Index Fund Investor, Admiral, Signal, Institutional, ETF
Large-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
Mid-Cap Growth Index Fund Investor, ETF
Mid-Cap Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
Mid-Cap Value Index Fund Investor, ETF
Small-Cap Growth Index Fund Investor, Institutional, ETF
Small-Cap Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
Small-Cap Value Index Fund Investor, Institutional, ETF
Total Stock Market Index Fund Investor, Admiral, Signal, Institutional, ETF
Value Index Fund Investor, Admiral, Signal, Institutional, ETF

 

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Vanguard Fund Share Classes Authorized
 
Vanguard International Equity Index Funds  
Emerging Markets Stock Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
European Stock Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
FTSE All-World ex US Index Fund Investor, Institutional, Institutional Plus, ETF
Pacific Stock Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF
Total World Stock Index Fund Investor, Institutional, ETF
FTSE All World ex-US Small-Cap Index Fund Investor, Institutional, ETF
Global ex-U.S. Real Estate Index Fund Investor, Signal, Institutional, ETF
 
Vanguard Malvern Funds  
Asset Allocation Fund Investor, Admiral
Capital Value Fund Investor
U.S. Value Fund Investor
 
Vanguard Massachusetts Tax-Exempt Funds  
Massachusetts Tax-Exempt Fund Investor
 
Vanguard Money Market Funds  
Prime Money Market Fund Investor, Institutional
Federal Money Market Fund Investor
 
Vanguard Morgan Growth Fund Investor, Admiral
 
Vanguard Montgomery Funds  
Vanguard Market Neutral Fund Investor, Institutional
 
Vanguard Municipal Bond Funds  
Tax-Exempt Money Market Fund Investor
Short-Term Tax-Exempt Fund Investor, Admiral
Limited-Term Tax-Exempt Fund Investor, Admiral
Intermediate-Term Tax-Exempt Fund Investor, Admiral
Long-Term Tax-Exempt Fund Investor, Admiral
High-Yield Tax-Exempt Fund Investor, Admiral
Short-Term Municipal Bond Index Fund Admiral, ETF
Intermediate-Term Municipal Bond Index Fund Admiral, ETF
Long-Term Municipal Bond Index Fund Admiral, ETF
 
Vanguard New Jersey Tax-Free Funds  
Tax-Exempt Money Market Fund Investor
Long-Term Tax-Exempt Fund Investor, Admiral
 
Vanguard New York Tax-Free Funds  
Tax-Exempt Money Market Fund Investor
Long-Term Tax-Exempt Fund Investor, Admiral

 

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Vanguard Fund Share Classes Authorized
 
Vanguard Ohio Tax-Free Funds  
Tax-Exempt Money Market Fund Investor
Long-Term Tax-Exempt Fund Investor
 
Vanguard Pennsylvania Tax-Free Funds  
Tax-Exempt Money Market Fund Investor
Long-Term Tax-Exempt Fund Investor, Admiral
 
Vanguard Quantitative Funds  
Growth and Income Fund Investor, Admiral
 
Vanguard Scottsdale Funds  
Short-Term Government Bond Index Fund Institutional, Signal, ETF
Intermediate-Term Government Bond Index Fund Institutional, Signal, ETF
Long-Term Government Bond Index Fund Institutional, Signal, ETF
Short-Term Corporate Bond Index Fund Institutional, Signal, ETF
Intermediate-Term Corporate Bond Index Fund Institutional, Signal, ETF
Long-Term Corporate Bond Index Fund Institutional, Signal, ETF
Mortgage-Backed Securities Index Fund Institutional, Signal, ETF
Explorer Value Fund Investor
Russell 1000 Index Fund Institutional, ETF
Russell 1000 Value Index Fund Institutional, ETF
Russell 1000 Growth Index Fund Institutional, ETF
Russell 2000 Index Fund Institutional, ETF
Russell 2000 Value Index Fund Institutional, ETF
Russell 2000 Growth Index Fund Institutional, ETF
Russell 3000 Index Fund Institutional, ETF
 
Vanguard Specialized Funds  
Energy Fund Investor, Admiral
Precious Metals Fund Investor
Health Care Fund Investor, Admiral
Dividend Growth Fund Investor
REIT Index Fund Investor, Admiral, Signal, Institutional, ETF
Dividend Appreciation Index Fund Investor, ETF
 
Vanguard STAR Funds  
Developed Markets Index Fund Investor, Institutional, Institutional Plus
LifeStrategy Conservative Growth Fund Investor
LifeStrategy Growth Fund Investor
LifeStrategy Income Fund Investor
LifeStrategy Moderate Growth Fund Investor
STAR Fund Investor
Total International Stock Index Fund Investor, Admiral, Signal, Institutional,
  Institutional Plus, ETF

 

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Vanguard Fund Share Classes Authorized
 
Vanguard Tax-Managed Funds  
Tax-Managed Balanced Fund Investor
Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional
Tax-Managed Growth and Income Fund Investor, Admiral, Institutional
Tax-Managed International Fund Investor, Institutional
Vanguard Europe Pacific ETF ETF
Tax-Managed Small-Cap Fund Investor, Institutional
 
Vanguard Trustees’ Equity Fund  
International Value Fund Investor
Diversified Equity Fund Investor
 
Vanguard Valley Forge Funds  
Balanced Index Fund Investor, Admiral, Signal, Institutional
Managed Payout Growth Focus Fund Investor
Managed Payout Growth and Distribution Fund Investor
Managed Payout Distribution Focus Fund Investor
 
Vanguard Variable Insurance Funds  
Balanced Portfolio Investor
Diversified Value Portfolio Investor
Equity Income Portfolio Investor
Equity Index Portfolio Investor
Growth Portfolio Investor
Total Bond Market Index Portfolio Investor
High Yield Bond Portfolio Investor
International Portfolio Investor
Mid-Cap Index Portfolio Investor
Money Market Portfolio Investor
REIT Index Portfolio Investor
Short-Term Investment Grade Portfolio Investor
Small Company Growth Portfolio Investor
Capital Growth Portfolio Investor
Total Stock Market Index Portfolio Investor
 
Vanguard Wellesley Income Fund Investor, Admiral
 
Vanguard Wellington Fund Investor, Admiral
 
Vanguard Whitehall Funds  
Selected Value Fund Investor
Mid-Cap Growth Fund Investor
International Explorer Fund Investor
High Dividend Yield Index Fund Investor, ETF

 

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Vanguard Fund Share Classes Authorized
 
Vanguard Windsor Funds  
Windsor Fund Investor, Admiral
Windsor II Investor, Admiral
 
Vanguard World Funds  
Extended Duration Treasury Index Fund Institutional, Institutional Plus, ETF
FTSE Social Index Fund Investor, Institutional
International Growth Fund Investor, Admiral
Mega Cap 300 Index Fund Institutional, ETF
Mega Cap 300 Growth Index Fund Institutional, ETF
Mega Cap 300 Value Index Fund Institutional, ETF
U.S. Growth Fund Investor, Admiral
Consumer Discretionary Index Fund Admiral, ETF
Consumer Staples Index Fund Admiral, ETF
Energy Index Fund Admiral, ETF
Financials Index Fund Admiral, ETF
Health Care Index Fund Admiral, ETF
Industrials Index Fund Admiral, ETF
Information Technology Index Fund Admiral, ETF
Materials Index Fund Admiral, ETF
Telecommunication Services Index Fund Admiral, ETF
Utilities Index Fund Admiral, ETF

 

Original Board Approval: July 21, 2000
Last Updated: November 24, 2010

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SCHEDULE B to

VANGUARD FUNDS MULTIPLE CLASS PLAN

Vanguard has policies and procedures designed to ensure consistency and compliance with the offering of multiple classes of shares within this Multiple Class Plan’s eligibility requirements. These policies are reviewed and monitored on an ongoing basis in conjunction with Vanguard’s Compliance Department.

Investor Shares - Eligibility Requirements

Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors.

Admiral Shares – Eligibility Requirements

Admiral Shares generally are intended for clients who meet the required minimum initial investment and ongoing account balance of $10,000 for retail clients in index funds, $50,000 for retail clients in actively managed funds, $100,000 for financial intermediary and other institutional clients as may be determined by Vanguard management, and $10 million for Institutional Retirement Plan Services clients. Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Admiral Shares and Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Share class eligibility also is subject to the following rules:

Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Admiral Shares if they meet eligibility criteria established by Vangaurd management. These eligibility criteria include, but are not limited to the following factors, which may be changed at any time and without prior notice: (1) the total amount invested in the Fund must be greater than $10 million; and (2) the extent to which the client uses Fund and Vanguard account services. For purposes of this analysis, Vanguard management may consider clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts.

Certain Retirement Plans: Admiral Shares generally are not available to 403(b)(7) custodial accounts and SIMPLE IRAs held directly with Vanguard.

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Financial Intermediaries –Admiral Shares are not available to financial intermediaries who would meet eligibility requirements by aggregating the holdings of underlying investors within an omnibus account. However, a financial intermediary may hold Admiral Shares in an omnibus account if:

(1)       each underlying investor in the omnibus account individually meets the $100,000 minimum amount; and
(2)       the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the $100,000 minimum amount; or
(3)       a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance with the eligibility requirements established by Vanguard.

Asset Allocation Fund

Admiral Shares of Asset Allocation Fund are not

available to certain institutional clients who receive no special recordkeeping services from Vanguard.

Account Aggregation

Vanguard institutional clients may hold Admiral

Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund is at least $1 million. For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of institutional clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The aggregation rule does not apply to institutional clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries.

Accumulation Period

Accounts funded by institutional clients through

regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels , may qualify for Admiral Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Admiral Shares within a limited period of time (generally 90 days).

Signal Shares – Eligibility Requirements

Signal Shares generally are intended for institutional and financial intermediary clients who meet the then-current eligibility requirements Eligibility criteria are subject to the discretion of Vanguard management, and Vanguard reserves the right to establish higher

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or lower minimum amounts for certain investors or a group of investors and to change such requirements at any time. Signal Share class eligibility also is subject to the following rules:

Previously held Admiral Shares or Investor Shares . Admiral Shares or Investor Shares held by institutional and financial intermediary clients prior to the effective date of Signal Shares may be converted at the discretion of Vanguard management into Signal Shares.

Institutional intermediary clients . Institutional clients that are financial intermediaries generally may hold Signal Shares without restriction.

Mutual fund supermarkets . Signal Shares generally are not available to financial intermediaries that serve as mutual fund supermarkets. Generally, mutual fund supermarkets means a program or platform offered by an intermediary or an underlying intermediary through which its individual investors (person), on a self-directed basis, may purchase and sell mutual funds offered by a variety of independent fund families. This definition may be changed or amended at any time and without prior notice as may be determined in the discretion of management.

Vanguard Brokerage Services . Nothing in the definition of mutual fund supermarket, or any other eligibility requirements, should be construed to prohibit Vanguard Brokerage Services (VBS) from offering Signal Shares to its clients.

Institutional clients whose accounts are not recordkept by Vanguard . Institutional clients, including but not limited to financial intermediary and defined benefit and contribution plan clients, endowments, and foundations whose accounts are not recordkept by Vanguard may hold Signal Shares without restriction.

Institutional clients whose accounts are recordkept by Vanguard . Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if they meet eligibility criteria established by Vanguard management. These eligibility criteria include, but are not limited to the following factors, which may be changed at any time and without prior notice: (1) the total amount invested in the Fund must be greater than $5 million and (2) the extent to which the client uses Fund and Vanguard account services. For purposes of this analysis, Vanguard management may consider clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts.

Accumulation Period. Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels , may qualify for Signal Shares upon

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account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Signal Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management.

Institutional Shares – Eligibility Requirements

Institutional Shares generally require a minimum initial investment and ongoing account balance of $5,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Share class eligibility also is subject to the following special rules:

Vanguard Short-Term Investment Grade Fund - $50,000,000 minimum amount for Institutional Shares

Vanguard Long-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares

Vanguard Intermediate-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares

Individual clients . Individual clients may hold Institutional Shares by aggregating up to 3 accounts held by the same client (same tax I.D. number) in a single Fund.

Institutional intermediary clients . Institutional clients that are financial intermediaries generally may hold Institutional Shares for the benefit of their underlying clients provided that each underlying client account invests at least $5 million (or such higher minimum required by the individual fund) in the Fund.

Institutional clients whose accounts are not recordkept by Vanguard . Institutional clients, including but not limited to financial intermediary and defined benefit and contribution plan clients, endowments, and foundations whose accounts are not recordkept by Vanguard may hold Institutional Shares if the total amount aggregated among all accounts held by such client and invested in the Fund is at least $5 million (or such higher minimum required by the individual fund). Such institutional clients must disclose to Vanguard on behalf of their accounts the following: (1) that each account has a common decision-maker; and (2) the total balance in each account held by the client in the Fund.

Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Institutional

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Shares if they meet eligibility criteria established by Vanguard management. These eligibility criteria include, but are not limited to the following factors, which may be changed at any time and without prior notice: (1) the total amount invested in the Fund must be greater than $10 million (or such higher threshold as may be set by management) and (2) the extent to which the client uses Fund and Vanguard account services. For purposes of this analysis, Vanguard management may consider clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts.

Investment by Vanguard Target Retirement Collective Trust. A Vanguard Target Retirement Trust that is a collective trust exempt from regulation under the Investment Company Act and that seeks to achieve its investment objective by investing in underlying Vanguard Funds (a “TRT”) may hold Institutional Shares of an underlying Fund whether or not its investment meets the minimum investment threshold specified above.

Accumulation Period

Accounts funded through regular contributions (e.g.

employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels , may qualify for Institutional Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management.

Institutional Plus Shares - Eligibility Requirements

Institutional Plus Shares generally require a minimum initial investment and ongoing account balance of $100,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Plus Share class eligibility also is subject to the following special rules:

Financial Intermediaries - Institutional Plus Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. However, a financial intermediary may hold Institutional Plus Shares in an omnibus account if:

(1) each underlying investor in the omnibus account individually meets the investment minimum amount described above; and (2) the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the investment minimum amount; or (3) a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance

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with the eligibility requirements established by Vanguard.

VISTA - Institutional Plus Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping, unless Vanguard management determines that a plan sponsor's aggregate assets within the Vanguard Funds will likely generate substantial economies in the servicing of their accounts.

Account Aggregation - Vanguard clients may hold Institutional Plus Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund meets the minimum investment for the Fund’s Institutional Plus Shares. For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries.

Accumulation Period - Accounts funded through regular contributions e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Plus Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Plus Shares within a limited period of time (generally 90 days).

Asset Allocation Models - Vanguard clients with defined asset allocation models whose assets meet eligibility requirements may qualify for Institutional Plus Shares if such models comply with policies and procedures that have been approved by Vanguard management.

ETF Shares – Eligibility Requirements

The eligibility requirements for ETF Shares will be set forth in the Fund’s Registration Statement. To be eligible to purchase ETF Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing ETF Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of ETF Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund’s ETF Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash.

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Original Board Approval: July 21, 2000 Last Updated: November 19, 2010

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