What Is a War Bond?

What Is a War Bond?

Let me explain what a war bond is: it's a debt security that a government issues to finance military operations during wars or conflicts. Since these bonds offer a rate of return below the market rate, governments rely on emotional appeals to patriotic citizens to encourage them to lend money.

Key Takeaways

You should know that a war bond is essentially a government initiative to fund military operations by issuing debt for public purchase. People buy them out of patriotic duty or other emotional reasons. Even though they don't typically pay interest, they're sold at a discount and mature to their face value after 10 to 30 years.

Understanding War Bonds

Think of a war bond as a debt instrument where the government borrows money to support defense and military efforts in wartime—it's basically a loan from you to the government. These bonds are sold below face value, so you pay less upfront and get the full face value at maturity. They're zero-coupon bonds, meaning no interest payments along the way; your return is the difference between what you paid and the face value.

War bonds were designed as baby bonds with smaller face values to make them accessible to everyday investors. They're nontransferable, so only you, the original buyer, can redeem them. Originally, they matured in 10 years with a 2.9% return, but Congress extended that—bonds from 1941 to 1965 accrued interest for 40 years, and later ones for 20 years. After World War II, they became Series E bonds, which the U.S. issued until 1980, when Series EE replaced them.

Characteristics of War Bonds

U.S. war bonds, also called Liberty bonds in some years, differ from other Treasury securities. They're zero-coupon, paying no interest over their life, and you buy them at a discount—often 50% to 75% of face value—then receive the full amount at maturity. Maturity varies by issue year; early World War II bonds took 10 years, but laws changed to allow up to 40 years of interest accrual.

The History of War Bonds

Countries like the U.S., Canada, Germany, the UK, and Austria-Hungary have issued war bonds. In the U.S., the War Advertising Council promoted them through patriotism, since returns were below market rates. Ads ran on radio, in newspapers, magazines, and theater newsreels. Stars like Bette Davis and Rita Hayworth toured to boost sales. You could save 25 cents at a time for bonds, Girl Scouts sold 10-cent stamps, and Norman Rockwell created promotional paintings.

Recently, after Russia's 2022 invasion of Ukraine, their government issued war bonds to fund fighters and expenses. By March 1, they raised $270 million from a one-year bond at 11% yield, eventually totaling nearly $1 billion from multiple issues.

Advantages and Disadvantages of War Bonds

Governments benefit from war bonds by raising quick money for military campaigns through patriotic appeals, allowing lower yields than market rates, and they help curb inflation by pulling money out of circulation. As an investor, you might profit by speculating on war outcomes—buying a struggling country's bonds if you expect a turnaround—but you risk losing if they lose the war.

On the downside, these aren't always great investments. U.S. war bonds paid no interest during their term and offered lower profits than other options. Plus, heavy borrowing means a country must repay a lot post-war.

Example of War Bonds

In the U.S., the War Finance Committee oversaw war bond sales. They started as Liberty Bonds in 1917 for World War I, raising $21.5 billion. After Pearl Harbor in 1941, they became War Bonds for World War II, with over 80 million Americans buying them to generate $180 billion. Sold at 50% to 75% of face value, denominations ranged from $10 to $1,000.

How Do You Buy Ukrainian War Bonds?

If you're a Ukrainian citizen or resident, you can buy them through a licensed broker or bank. Overseas institutional investors can too, but it's unclear for foreign retail investors.

What Is the Purpose of War Bonds?

Their purpose is to raise money for military costs without heavy taxes or inflation-causing policies. But governments must watch out—they could end up with more debt than they can handle.

How Much Are War Bonds Worth Today?

The U.S. government provides an online tool to calculate current values. For example, a 1942 Series E bond with $100 face value is worth $377.40 as of September 2022.

The Bottom Line

War bonds let countries secure emergency funds for military needs at lower costs than standard bonds, but they come with risks like lower yields and potential default losses for investors.