War Bonds

War Bonds

Andrew Ancheta is a finance editor with extensive experience reporting on cryptocurrency, NFTs, economics, and history. He previously worked as an editor for China Daily.

What Is a War Bond?

A war bond is a debt security issued by a government to finance military operations during times of war or conflict. War bonds offer a rate of return below the market rate, relying on emotional appeals to patriotic citizens to lend the government money.

Key Takeaways

  • A war bond is issued by a government to fund military operations by issuing debt for public purchase.
  • The public may buy war bonds due to patriotic duty or other emotional appeals.
  • Though war bonds don’t typically pay interest, they are sold at a discount and mature to their face value after 10 to 30 years.

Understanding War Bonds

A war bond is a government-issued debt instrument used to borrow money for defense initiatives and military efforts during war. It essentially functions as a loan to the government.

War bonds are sold below their face value, meaning investors pay less initially and receive the face value at maturity. They are considered zero-coupon bonds, as they don’t pay interest or coupon payments throughout the year. Instead, investors earn the difference between the purchase price and the face value at maturity.

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War bonds have a smaller par value compared to standard bonds, making them affordable for retail investors. They are nontransferable, meaning only the original purchaser can redeem them. Initially, war bonds had a 10-year maturity, offering a 2.9% return.

Congress extended the interest period for bonds sold from 1941 to 1965 to 40 years. Bonds issued after 1965 accrued interest for 20 years. After World War II, War Bonds became known as Series E bonds, which the U.S. government continued issuing until 1980 when they were replaced by Series EE bonds.

Characteristics of War Bonds

War bonds issued by the United States have unique features compared to other Treasury securities.

War bonds, also known as Liberty bonds, are zero-coupon securities, meaning they don’t pay interest over the bond’s lifetime. The face value differs from the actual bond price. Buyers purchase the bond at a discount, typically between 50% and 75% of the face value, receiving the full face value at maturity.

The exact maturity date depends on the year of issuance. Early World War II bonds could be cashed out after ten years. Congress later amended the law to allow war bonds to accumulate interest for 40 years.

The History of War Bonds

Besides the United States, other countries like Canada, Germany, the United Kingdom, and Austria-Hungary issued war bonds.

In the U.S., the War Advertising Council promoted bond buying through patriotic and conscience appeals. Advertisements for war bonds were carried out through various media, including radio stations, newspapers, magazines, and newsreels in theaters. Hollywood stars like Bette Davis and Rita Hayworth toured the country to promote war bonds. Norman Rockwell created paintings as part of the advertising effort.

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In 2022, following the Russian invasion of Ukraine, the Ukrainian government issued war bonds to finance military expenses. The bond raised $270 million with an 11% yield. Several successive bond issues raised a total of nearly $1 billion.

Advantages and Disadvantages of War Bonds

War bonds enable governments to quickly raise funds for military campaigns through a lower yield, relying on patriotic appeals. They can also reduce inflation by removing excess money from the economy.

For investors, war bonds can be a way to speculate on the outcome of a war. However, they carry the risk of losing the investment if the war is lost.

Despite some advantages, United States war bonds didn’t pay interest over their lifetime and offered lower profits compared to other bonds. Additionally, countries heavily borrowing for war efforts must repay all the debt after the war concludes.

  • War Bonds could be purchased below their face value.
  • War Bonds were guaranteed by the U.S. government.
  • Investors experienced pride and patriotism by helping the nation during war.
  • War Bonds paid a lower interest rate than other securities.
  • War Bonds didn’t pay interest payments throughout their life.
  • Selling War Bonds before maturity carried the risk of a lower sale price.

Example of War Bonds

In the U.S., the sale of war bonds was overseen by the War Finance Committee. Liberty Bonds were first issued in 1917 to finance U.S. government participation in World War I. These bonds raised $21.5 billion for war efforts.

After the Japanese attack on Pearl Harbor in 1941, Defense Bonds were renamed War Bonds. Over 80 million Americans purchased war bonds, generating over $180 billion in revenue. The bonds were sold at a discount of 50% to 75% of their face value, with denominations ranging from $10 to $1,000.

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How Do You Buy Ukrainian War Bonds?

Ukrainian citizens and residents can buy war bonds through a licensed broker or bank in Ukraine. Availability for foreign retail investors is unclear.

What Is the Purpose of War Bonds?

War bonds enable countries to raise money for military expenditures without heavy taxation or inflationary monetary policy. However, governments must be cautious not to accumulate excessive debt they cannot repay.

How Much Are War Bonds Worth Today?

The U.S. government provides an online tool to calculate the current value of war bonds. For example, a Series E bond issued in 1942 with a face value of $100 would be worth $377.40 in September 2022.

The Bottom Line

War bonds allow countries to raise emergency funds for military expenditures at a lower cost than typical sovereign bond issues. However, they involve risks, such as lower yields and the possibility of losing the investment if the country defaults.

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