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The Interest Accumulation Portfolio seeks income consistent with the preservation of principal.
The Portfolio directs all of its assets into Vanguard Short-Term Reserves Account, through which the Portfolio indirectly owns funding agreements (traditional and separate account), synthetic investment contracts (SICs), and shares of Vanguard Federal Money Market Fund. Funding agreements and SICs are interest-bearing contracts that are structured to preserve principal and accumulate interest earnings over the life of the investment. Traditional funding agreements generally pay interest at a fixed interest rate and have fixed maturity dates that normally range from 2 to 5 years. Separate account funding agreements and SICs pay a variable interest rate and have an average duration range between 2 and 5 years. Investments in either new funding agreements or SICs are based on available liquidity in the Portfolio, and the competitiveness of offered yields, based on market conditions and trends. Short-Term Reserves Account also purchases shares of the Federal Money Market Fund to meet normal liquidity needs.
The total amount invested in the Federal Money Market Fund is expected to range between 0% and 25%. The Federal Money Market Fund invests primarily in high-quality, short-term money market instruments issued by the U.S. government and its agencies and instrumentalities. Although these securities are high-quality, most of the securities held by the Fund are neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of the U.S. government. To be considered high-quality, a security must be determined by Vanguard to present minimal credit risk based in part on a consideration of maturity, portfolio diversification, portfolio liquidity, and credit quality. The Fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less.
The performance of the Interest Accumulation Portfolio will reflect the blended earnings of the funding agreements, SICs, and Federal Money Market Fund shares held by the Portfolio (minus the Portfolio's expenses).
The Portfolio has a longer average maturity than money market funds, which should result in higher yields when interest rates are stable or declining. However, because only a portion of the Portfolio's investment matures each year, its yield will change more slowly than that of a money market fund. As a result, when interest rates are rising, the Portfolio's yield may fall below money market funds' yields for an extended time period. The Portfolio may, from time to time, invest all or a significant portion of its assets in the Federal Money Market Fund.
The Interest Accumulation Portfolio seeks income consistent with the preservation of principal.
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**Consists of the Ryan Labs 3 year GIC Index (90%), and FTSE 3-month T-Bill Index (10%).
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