Risk Descriptions

Call/Prepayment Risk This is the risk that during periods of falling interest rates, issuers of callable bonds may call (repay) securities with higher coupons or interest rates before their maturity dates. The Underlying Fund would lose potential price appreciation and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Underlying Fund's income. For mortgage-backed securities, this risk is known as prepayment risk.

Credit Risk This is the risk that an issuer of a security owned by an Underlying Fund will fail to pay principal or interest in a timely manner, or that negative perceptions of the issuer's ability to make such payments will cause the price of that security to decline.

Derivatives Risk Each of the Underlying Funds may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). The Underlying Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.

Foreign Securities Risk Underlying Funds that invest in foreign securities are subject to country risk, which is the chance that domestic events, such as political upheaval, financial troubles, or natural disasters, will weaken a country's securities markets. They are also subject to currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Finally, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions.

Income Fluctuation Risk This is the risk that an Underlying Fund's quarterly income distributions will fluctuate considerably more than the income distributions of a typical bond fund. For the Vanguard Inflation-Protected Securities Fund, income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation rates are expected to be high.

Income Risk This is the risk that falling interest rates will cause an Underlying Fund's income to decline. Income risk is generally high for short-term bond funds and low for long-term bond funds.

Index Sampling Risk This is the risk that the securities selected for an Underlying Fund using the sampling method of indexing will not provide investment performance matching that of the target index.

Industry Concentration Risk This is the risk that there will be overall problems affecting a particular industry in which an Underlying Fund invests more than 25% of its assets. Because of indirect investments in the Vanguard Prime Money Market Fund, which invests more than 25% of its assets in securities of companies in the financial services industry, Portfolio performance will depend to a greater extent on the overall condition of that industry.

Interest Rate Risk This is the risk that bond prices overall will decline because of rising interest rates. Interest rate risk should be high for long-term bond funds and low for short-term bond funds.

Manager Risk This is the risk that poor security selection will cause an Underlying Fund to underperform relevant benchmarks or other funds with a similar investment objective.

Stock Market Risk This is the risk that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.

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