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. Because war bonds offered a rate of return below the market rate, investment was achieved by making emotional appeals to patriotic citizens to lend the government money.
- A war bond is an initiative by a government to fund military operations and spending by issuing debt for the public to purchase.
- The public may buy these bonds out of a feeling of patriotic duty, or other emotional appeal.
- Although war bonds do not typically pay interest, they are sold at a discount that mature to face value, typically after a period of 10-30 years.
Understanding War Bonds
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. A war bond is essentially a loan to a government. In the U.S., the sale of war bonds was overseen by the War Finance Committee. 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 dollars for its war efforts.
After the Japanese attack on Pearl Harbor Dec. 7, 1941, the U.S. entered the second world war, and Defense Bonds were renamed as War Bonds. More than 80 million Americans purchased war bonds and brought in over $180 billion in revenue. The bonds sold for 50% to 75% of their face value and had denominations ranging from $10 to $1,000, depending on the year they were issued. The bonds were sold below their face value—investors paid less than the face value initially and were paid the face value amount at maturity. In other words, war bonds were considered zero-coupon bonds because they didn't pay interest payments throughout the year or coupon payments. Instead, investors earned the difference between the purchase price and the face value of the bond at maturity.
War bonds were baby bonds, which meant they had smaller par values, or face values, than standard bonds. This made them more affordable for retail investors. Another feature of the bonds was that they were nontransferable—only the bond purchaser could redeem the bonds in the future. War bonds originally had a 10-year maturity, which resulted in a 2.9% return. Congress extended the interest that could be earned so that bonds sold from 1941 to 1965 accrued interest for 40 years. Bonds issued after 1965 accrued interest for 20 years. After the end of World War II, War Bonds became known as Series E bonds. The U.S. government continued issuing Series E bonds until 1980 when Series EE bonds replaced them.
History of War Bonds
Besides the United States government, other countries also issued war bonds, including Canada, Germany, the United Kingdom, and Austria-Hungary.
In the U.S., the War Advertising Council promoted voluntary compliance with bond buying. Motives to purchase war bonds were embedded on patriotism and conscience, given that these bonds offered a rate of return that was below the prevailing interest rates in the market.
Advertisements for the bonds were carried out through multiple media such as radio stations, newspapers, magazines, and newsreels in theaters to reach the American people. Hollywood stars like Bette Davis and Rita Hayworth helped promote war bonds by touring the country. People could save up for War Bonds by contributing 25 cents each time. The Girl Scouts also sold stamps valued at 10 cents each. Norman Rockwell created several paintings as part of the advertising effort for War Bonds.
Advantages and Disadvantages of War Bonds
War Bonds could be purchased for a price that was below their face value
War Bonds were guaranteed by the U.S. government
Investors experienced a sense of pride and patriotism by helping the nation in times of war
Paid a lower interest rate than other securities in the market
War Bonds did not pay interest payments throughout the life of the bonds
As with any security, War Bonds carried the risk of a loss if sold before maturity for a lower price than the purchase price
Example of a War Bond
Although War Bonds are not sold any longer, as an example, let's assume an investor purchased a war bond and held it until its maturity in 10 years. The bond was purchased for $75, or at a discount to the $100 face value of the bond. The investor holds the bond for 10 years and is paid no-interest payments over those 10 years. At maturity, the investor cashes in the bond and is paid the $100 face value.