What is a war bond?
A war bond is a debt security issued by a government to finance military operations in times of war or conflict. Because war bonds offered a lower rate of return than the market rate, the investment was made by making emotional appeals to patriotic citizens to lend money to the government.
Key points to remember
- A war bond is an initiative by a government to fund military operations and expenditures by issuing debt that the public can buy.
- The public may buy these bonds out of a sense of patriotic duty or some other emotional appeal.
- Although war bonds generally do not pay interest, they are sold at a discount which matures at face value, usually after a period of 10 to 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 wartime. A war bond is essentially a loan to a government. In the United States, the sale of war bonds was overseen by the War Finance Committee. War Bonds were originally known as Defense Bonds and were first issued as Liberty Bonds in 1917 to fund the United States government’s 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 December 7, 1941, the United States entered World War II and Defense Bonds were renamed War Bonds. More than 80 million Americans bought war bonds and brought in more than $180 billion in revenue. 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.
Bonds were sold below face value – investors paid less than face value initially and received the face value amount at maturity. In other words, war bonds were considered zero coupon bonds because they haven’t paid interest 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 nominal values, or face values, than standard bonds. This has made them more affordable for retail investors. Another feature of the bonds was that they were not transferable – only the buyer of the bonds could redeem the bonds in the future. The war bonds originally had a 10-year maturity, resulting in a yield of 2.9%.
Congress extended the interest that could be earned so that bonds sold from 1941 to 1965 increased interest for 40 years. Bonds issued after 1965 bear interest for 20 years. After the end of World War II, war bonds became Series E bonds. The US government continued to issue Series E bonds until 1980, when Series EE bonds replaced them.
The 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 United States, the War Advertising Council has promoted voluntary compliance with the purchase of bonds. The motives for buying war bonds were rooted in patriotism and conscience, since these bonds offered a lower rate of return than prevailing market interest rates.
Ads for the bonds were run 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 for war bonds by contributing 25 cents each time. The Girl Scouts also sold stamps worth 10 cents each. Norman Rockwell created several paintings as part of the publicity effort for War Bonds.
Advantages and Disadvantages of War Bonds
War bonds could be purchased at less than face value.
The war bonds were guaranteed by the US government.
Investors felt a sense of pride and patriotism helping the nation in times of war.
Paid a lower interest rate than other securities on the market.
War bonds paid no interest for the life of the bonds.
As with any security, war bonds carried the risk of loss if sold before maturity at less than the purchase price.
Example of War Bond
Although war bonds are no longer sold, as an example, suppose an investor buys a war bond and holds it until it matures in 10 years. The bond was purchased for $75, or less than the $100 face value of the bond. The investor holds the bond for 10 years and receives no interest payments during those 10 years. At maturity, the investor cashes in the bond and receives the face value of $100.
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