Discover the Patriotic Power of War Bonds
A war bond is a debt security issued by a government to finance military operations during times of war or conflict. These bonds often offer a return rate below the market rate but garner investment through emotional appeals to patriotic citizens.
Key Highlights
- A war bond is a government initiative to fund military operations by issuing debt for public purchase.
- Citizens might purchase these bonds out of patriotic duty or other emotional appeals.
- War bonds typically do not pay interest but are sold at a discount and mature to face value, usually after 10 to 30 years.
The Mechanics of War Bonds
A war bond serves as a government loan used to fund defense initiatives and military efforts during war. Sold below face value, war bonds allowed investors to pay less than the face value initially and receive the full amount at maturity. Essentially, these bonds are similar to zero-coupon bonds, where investors earn the difference between the purchasing price and the face value at maturity.
These bonds, often referred to as baby bonds due to their smaller face value compared to standard bonds, were affordable for retail investors. They were nontransferable, meaning only the bond purchaser could redeem them. Their original 10-year maturity offered a 2.9% return, with subsequent modifications extending accrual interest for up to 40 years for some issues. Series E bonds replaced War Bonds post-World War II, continuing until the introduction of Series EE bonds in 1980.
Key Features of War Bonds
War bonds, also known as Liberty bonds, presented unique characteristics separate from other Treasury securities. These included:
- Issuance as zero-coupon bonds, meaning no interest was paid over their lifetime.
- Sold at a discount, often between 50%-75% of the bond’s face value, with full face value paid upon maturity.
- Maturity periods varying based on the issuance year, later amendments extended interest accrual periods.
A Glance at History
Several countries, including the United States, Canada, Germany, the United Kingdom, and Austria-Hungary, have issued war bonds. Motivated by patriotism, the American public was driven by mass media campaigns, often involving celebrities and cultural icons like Bette Davis, Rita Hayworth, and Norman Rockwell. After the 2022 Russian invasion of Ukraine, the Ukrainian government also issued war bonds, raising funds for its military efforts.
Pros and Cons of Investing in War Bonds
Advantages:
- Purchase below face value.
- Guarantee by the issuing government.
- Patriotic sense of aiding the nation.
Disadvantages:
- Lower interest rate than other securities.
- No interest payments throughout the bond’s life.
- Risk of loss if sold before maturity for a lower price.
Real-Life Example
The U.S. sale of war bonds, overseen by the War Finance Committee, began with Liberty Bonds in 1917 to fund World War I efforts, raising a staggering $21.5 billion. Following the Pearl Harbor attack in 1941, War Bonds succeeded Defense Bonds, with over 80 million Americans generating $180 billion in revenue. These bonds were issued in denominations from $10 to $1,000.
How to Buy Ukrainian War Bonds
Ukrainian war bonds can be purchased through Ukraine-licensed brokers or banks by citizens and residents. Although overseas institutional investors can participate, availability for foreign retail investors remains uncertain.
Purpose and Current Value
War bonds enable countries to fund military expenses without relying heavily on taxation or inflation-inducing policies. As for their current value, a $100 Series E bond issued in 1942 would now be worth around $377.40, as of September 2022.
Conclusion
War bonds offer nations a method to raise emergency funds for military support at a relatively low cost. However, they carry an inherent risk; lower yields and the potential for investment loss if the issuing country defaults can make them less attractive compared to other securities.
Related Terms: Liberty Bonds, Government Securities, Military Funding.
References
- CNBC. “Ukraine Raises $270 Million from Sale of War Bonds as Russia’s Invasion Continues”.
- CNN. “War Bonds, NFTs and Crypto: How Ukraine Is Funding Its Defense”.
- Ministry of Finance. “How to Buy Military Bonds”. (in Ukrainian).
- TreasuryDirect. “Calculate the Value of Your Paper Savings Bonds”.
