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What are War Bonds?

By Bajaj Broking Team

April 05, 2025

6 mins read

Bond

Synopsis:

War bonds are a specific type of debt instrument that help governments raise finance for their military operations during a war. Such bonds typically appeal to a sense of patriotism in Read more..citizens by making them feel that they are doing their part in a war by investing in these bonds. Recently, Ukraine has used war bonds to raise finance for its conflict with Russia. Read less

War bonds are a type of financial instrument that are issued by governments to raise funds for military operations and production in the times of a war. When a country is at war, it needs money to purchase weapons and to pay its soldiers.

Often, governments use war bonds to raise the needed finance. Another interesting feature of these bonds is that they appeal to a sense of patriotism in the citizens of a country. Such bonds often offer a rate of return lower than the market rate.

When an individual purchases a war bond, he is effectively providing a loan to his government, which in turn has to pay the bondholder an interest and repay the principal when due. Having discussed what war bonds are, let us talk about their purpose.

Purpose of War Bonds

War bonds help a government raise finance to support a country and fund military operations in the times of a war. When a country faces a war, its financial requirements are very high for two reasons. First, it needs money to fund the war. Second, economic activities often face disruptions during the times of a war. Hence, governments face a double whammy.

To deal with it, they issue war bonds, which help them purchase weapons, military supplies, medical care for soldiers, and even rebuild damaged areas. Instead of issuing war bonds, a government can also raise taxes, but that can be hard for people. Hence, governments often choose the route of war bonds.

Historical Context of War Bonds

It is important to understand the historical context in which war bonds were issued by governments worldwide to finance their military operations to develop a nuanced understanding of such bonds.

War Bonds in World War I

Both retail and wholesale investors purchased war bonds during World War 1, as such bonds helped governments finance military activities. Meanwhile, strong campaigns led by propaganda were used to appeal to citizens’ sense of patriotism to make it seem to them that it was their duty to purchase war bonds during WW1.

The US government managed to raise a significant amount of finance through the issuance of Liberty Bonds between 1917 and 1919. However, when they were first issued, Liberty Bonds did not attract much interest from investors. As a result, they traded at lower than their par value. So, they were reissued sometime later with a higher interest rate to garner more attention from investors.

Even famous movie-stars like Charlie Chaplin helped popularize these bonds. Although attempts were made to market war bonds, mostly wholesale investors (not retail investors) purchased them.

War Bonds in World War II

The US government issued war bonds by calling them “Defense Bonds” during World War II. Millions of American investors purchased war bonds, which helped their government raise billions of dollars. These war bonds were advertised at sports events and during radio shows to market them to as many investors as possible. By purchasing these bonds, a significant number of investors felt that they were doing their part to help their government in the war.

Characteristics of War Bonds

The following points explain the key features of war bonds in great detail:

Governments issue such bonds: As war bonds are meant for a country’s defence, they are issued by a nation’s government during the times of a war.
Appeal to feelings related to patriotism: Such bonds make an appeal to the feelings related to patriotism in the citizens of a country. As citizens purchase these bonds, they are made to feel that they are doing their part in a war.
Safe investments: War bonds are issued by a nation’s government. As they come with a government’s backing, they are considered a safe investment for people.
Meant for a variety of investors: War bonds are typically meant for all kinds of investors, whether retail or wholesale. Often, governments keep the purchase amounts of such bonds quite low to encourage more people to invest in them.
Fixed interest payments: War bonds offer fixed interest payments. Hence, investors know how much they will earn on such bonds.

Additionally Read - Types of Bonds

Advantages and Disadvantages of War Bonds

Like other bonds, war bonds too have their benefits and limitations. So, please read the following text:

Advantages of War Bonds

Help governments raise funds for a war: War bonds allow governments to raise finance for a war often at a discount to prevailing interest rates in the market.
Help control inflation: War bonds also help in controlling inflation. When people invest in such bonds, a lot of money is sucked out of the system, which helps curb inflation.

Disadvantages of War Bonds

Pay a lower interest rate: In the past, certain war bonds paid a lower interest rates than other rates prevailing in the market. Hence, from the viewpoint of the return on investment, they may not be an ideal option.
Possibility of a loss: An investor can incur a loss on a war bond if he sells it before its maturity at a price that is lower than its purchase price. Hence, there is a possibility of a loss in the case of war bonds.

Modern Examples of War Bonds

In modern times, governments print more money to finance military operations during a war, which creates more inflationary pressure on their economies than usual. After printing more money, governments issue war bonds, which reduces the money supply and curbs inflation. Recently, Ukraine has used such bonds to raise money for its war with Russia. As the Ukraine-Russia war has been prolonged, Ukraine is facing financial challenges. Hence, in such a situation, war bonds are helping Ukraine raise finance for its military operations.

Conclusion

War bonds have their advantages and disadvantages just as other bonds. Hence, before parking funds in them, investors need to thoroughly understand their terms. For example, they should know how much interest such bonds will pay and when they will repay the principal. Knowing everything in detail about war bonds will help investors plan their finances well.

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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