What is a War Bond

A war bond is a debt security issued by a government for the purpose of financing military operations during times of war. It is an emotional appeal to patriotic citizens to lend the government their money as these bonds offer a rate of return below the market rate.

BREAKING DOWN War Bond

A war bond is a debt instrument issued by a government as a means of borrowing money to finance its defense initiatives and military efforts during times of war. In the U.S., the sale of war bonds was overseen by the War Finance Committee. In addition, the War Advertising Council promoted voluntary compliance with bond buying. Advertisement for the bonds were carried out through multiple media such as radio stations, newspapers, magazines, and newsreels in theaters in order to reach the American population in large mass.

War bonds were initially known as Defense Bonds and were first issued as Liberty Bonds in 1917 to finance the United States government participation in World War I. Through the sale of these bonds, the government raised $21.5 billion for its war efforts. After the Japanese attack on Pearl Harbor on Dec 7, 1941, Defense Bonds were renamed War Bonds which brought in nearly $200 billion in sales. War Bonds, like Liberty Bonds, were issued as baby bonds that sold for a minimum of $18.75 with a ten-year maturity. The bonds were zero-coupon bonds that sold for 75% of their face value in denominations of $25 to $10,000, with some limitations. Therefore, an investor that purchased a bond from the government for $18.75 would have been repaid $25 face value when the bond matured. Large denominations of between $50 and $1000 were also made available, all of which, unlike the Liberty Bonds of the First World War, were non-negotiable bonds. To get an idea of the relative value of a dollar in 1942, in current terms, something that cost $1.00 in 1942, would cost around $15.02 in 2017.

The government issued war bonds in 1941 and continued the system until 1980. War bonds that were sold from 1941 to 1965 accrued interest for 40 years. Bonds issued after 1965 accrued interest for 20 years.

Motives to purchase war bonds were embedded on patriotism and conscience, given that these bonds offered a rate of return of 2.92%, which fell below the prevailing interest rates in the market. Another feature of the bond was that they were non-transferable, meaning that only the bond purchaser could redeem the bonds in the future. In addition, these bonds are issued as zero-coupon bonds. Zero-coupon bonds pay no interest during the life of the bond. Instead, these bonds are sold at a discount to par, representing the imputed interest of the bond on maturity date when the par value is paid to the bondholder. Furthermore, as mentioned above, war bonds are baby bonds. Baby bonds have smaller par values than the standard par amounts, making them more affordable for smaller investors.

Not only the United States government issued war bonds. Countries such as Canada, Germany, the United Kingdom and Austria-Hungary issued war bonds to finance their war efforts.