Vanguard Corporate Bond Funds Annual Report January 31, 2011

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Vanguard Corporate Bond Funds
Annual Report
January 31, 2011
Vanguard Short-Term Investment-Grade Fund
Vanguard Intermediate-Term Investment-Grade Fund
Vanguard Long-Term Investment-Grade Fund
Vanguard High-Yield Corporate Fund
> As interest rates generally remained low, the U.S. bond market had another
good year, although returns were not as exceptional as the year before.
> For the 12 months ended January 31, 2011, the Vanguard Corporate Bond Funds
posted returns ranging from about 4% for the Short-Term Investment-Grade
Fund to more than 13% for the High-Yield Corporate Fund.
> For the ten years through January 31, the average annual returns of the three
investment-grade funds significantly exceeded their peer-group average
returns, while the High-Yield Corporate Fund’s performance slightly lagged.
Contents
Your Fund’s Total Rturns. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
an’s Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Short-Term Investment-Grade Fund. . . . . . . . . . . . . . . . . . .16
ate-Term Investment-Grade Fund. . . . . . . . . . . . . 44
Long-Term Investment-Grade Fund. . . . . . . . . . . . . . . . . . . 68
gh-Yid Crporate Fund. . . . . . . . . . . . . . . . . . . . . . . . . . 85
bout Your Fund’s Expenses. . . . . . . . . . . . . . . . . . . . . . . 103
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of c ourse, the
risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Jean Maher.
A
o el Hi
Intermedi
Advisors
hCairm
eYour Fund’s Total Returns
Fiscal Year Ended January 31, 2011
30-D
Vanguard Short-Term Investment-Grade Fund
Investor Shares 1.89% 3.39% 0.99% 4.38%
Admiral™ Shares 2.00 3.50 0.99 4.49
Institutional Shares 2.04 3.54 0.99 4.53
Barclays Capital U.S. 1–5 Year Credit Bond Index 4.78
1–5 Year Investment-Grade Debt Funds Average 3.82
1–5 Year Investment-Grade Debt Funds Average: Derived from data provided by Lipper Inc.
Vanguard Intermediate-Term Investment-Grade Fund
Investor Shares 3.54% 4.98% 3.66% 8.64%
Admiral™ Shares 3.66 5.11 3.66 8.77
Barclays Capital U.S. 5–10 Year Credit Bond Index 9.09
Intermediate Investment-Grade Debt Funds
Average 6.25
Intermediate Investment-Grade Debt Funds Average: Derived from data provided by Lipper Inc.
Vanguard Long-Term Investment-Grade Fund
Investor Shares 5.63% 5.79% 1.22% 7.01%
Admiral™ Shares 5.75 5.92 1.22 7.14
Barclays Capital U.S. Long Credit A or Better
Bond Index 7.22
Corporate A-Rated Debt Funds Average 6.08
Corporate A-Rated Debt Funds Average: Derived from data provided by Lipper Inc.
Vanguard High-Yield Corporate Fund
Investor Shares 6.16% 8.23% 5.47% 13.70%
Admiral™ Shares 6.28 8.37 5.47 13.84
Barclays Capital U.S. Corporate High Yield Bond
Index 16.19
High-Current-Yield Funds Average 15.28
High-Current-Yield Funds Average: Derived from data provided by Lipper Inc.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are
available to certain institutional investors who meet specific administrative, service, and account-size criteria.
1
eturnsR eturnsR eturnsR Yields
Total Capital Income SEC ayDear Shareholder,
The powerful corporate bond rally that
began in 2009 continued, in more muted
fashion, during the fiscal year that ended
in January 2011. With short-term interest
rates anchored near 0% by Federal
Reserve policy, yield-hungry investors
generally reached further out along the
maturity curve and further down the
credit-quality ladder. As a result,
corporate bonds again outperformed
Chairman’s like-maturity U.S. Treasury bonds,
creating tailwinds for the Vanguard
Corporate Bond Funds.
The best performer for the fiscal year
was Vanguard High-Yield Corporate Fund,
which returned more than 13%. Returns
for the three investment-grade funds
ranged from more than 4% for the
Short-Term Investment-Grade Fund to
more than 8% for the Intermediate-Term
Investment-Grade Fund, outpacing the
average returns of their peers but trailing
their benchmark index returns. The
higher-quality orientation of the High-Yield
Corporate Fund again held back its results
relative to its comparative standards, but to
a much smaller degree than in the previous
fiscal year.
Amid continued strong investor demand,
especially for lower-quality bonds, the
30-day SEC yield for each fund was lower
at the end of January 2011 than it had
been the year before, as shown in the
table on page 6. And because bond prices
2
Letterand yields move in opposite directions, 5% for the year. As investors searched for
each fund’s capital return—from price yield, corporate bonds produced the best
appreciation—was positive. returns, with the riskiest credits leading
the market.
Please note: As part of our ongoing efforts
to lower the cost of investing for all of our Toward the end of the fiscal year, an
clients, we have broadened the availability improving economic outlook pushed
of our lower-cost Admiral Shares, reducing interest rates higher, putting pressure on
the Admiral minimums for most of our bond prices. This dynamic was evident in
actively managed funds from $100,000 the municipal bond market, where rising
to $50,000. rates and a confluence of other factors
weighed on prices. The expiration of the
A strong start but Build America Bonds program, for example,
a faltering finish for bonds raised the prospect of a spike in new
In January 2010, the bond market’s tax-exempt issuance, while the extension
near-term prospects looked dubious, in of federal tax rate cuts that were set to
large part because yields hovered near expire made munis’ tax exemption some-
generational lows. Over the following 12 what less attractive. For the full year, the
months, however, yields dipped lower still. muni market returned about 1%.
The taxable bond market returned about
Market Barmetero
Average Annual Total Returns
Periods Ended January 31, 2011
One Fi
Barclays Capital U.S. Aggregate Bond Index (Broad
taxable market) 5.06% 5.36% 5.82%
Barclays Capital Municipal Bond Index (Broad tax-exempt
market) 1.10 3.39 3.88
Citigroup Three-Month U.S. Treasury Bill Index 0.14 0.59 2.23
Russell 1000 Index (Large-caps) 23.33% 0.45% 2.51%
Russell 2000 Index (Small-caps) 31.36 4.57 2.64
Dow Jones U.S. Total Stock Market Index 24.31 1.22 2.86
MSCI All Country World Index ex USA (International) 18.50 -0.96 4.08
ICP
C Pri Index 1.63% 1.42% 2.12%
3
ce onsumer
Stocks
ondsB
Years Years Year
ve ThreeAs it has since December 2008, the minds, displaced by strong corporate earn-
Federal Reserve held its target for short- ings and a powerful rebound in consumer
term interest rates near 0%, keeping spending and in the manufacturing sector.
the returns available from money market
instruments such as the 3-month Treasury The U.S. stock market returned about
bill in the same neighborhood. 24%. Small- and mid-capitalization stocks,
often the first to respond to changes in the
Stocks rallied as economy economic outlook, did even better. As a
ground into gear group, non-U.S. stock markets returned
Global stock markets produced excellent more than 18%. Emerging markets were
returns for the fiscal year, with much of the the best performers. Despite high-profile
strength materializing in the second half. dramas in Europe’s government bond
Europe’s sovereign debt challenges and markets, European stocks produced
concerns that the economic recovery in double-digit gains. Asia’s developed
the United States might not reach escape markets turned in mixed results on local
velocity seemed to recede from investors’ exchanges, but the strength of the yen,
Fund C Its Peer Group
Investor Adalmir Insti Peer G
A
Short-Term Investment-Grade Fund 0.24% 0.12% 0.09% 0.87%
Intermediate-Term Investment-Grade
Fund 0.24 0.11 — 0.91
Long-Term Investment-Grade Fund 0.26 0.13 — 1.06
High-Yield Corporate Fund 0.28 0.15 — 1.22
The fund expense ratios shown are from the prospectus dated May 28, 2010, and represent estimated costs for the current fiscal year. For the
fiscal year ended January 31, 2011, the funds’ expense ratios were: for the Short-Term Investment-Grade Fund, 0.22% for Investo r Shares,
0.11% for Admiral Shares, and 0.07% for Institutional Shares; for the Intermediate-Term Investment-Grade Fund, 0.22% for Invest or Shares
and 0.10% for Admiral Shares; for the Long-Term Investment-Grade Fund, 0.24% for Investor Shares and 0.12% for Admiral Shares; for the
High-Yield Corporate Fund, 0.25% for Investor Shares and 0.13% for Admiral Shares. Peer-group expense ratios are derived from d ata
provided by Lipper Inc. an