Definition and Example of War Bonds
War bonds are essentially a loan to the government to help fund a war. They are marketed directly to citizens as a chance to support the war effort and earn a return in the process.
- Alternate name: Liberty bonds
In the U.S., war bonds came into prominence during World War I, when the country began selling Liberty Bonds. The bonds were marketed to play on Americans’ sense of patriotic duty, with slogans such as, “If You Can’t Enlist, Invest. Buy A Liberty Bond” and “Defend Your Country With Your Dollars.” Even Charlie Chaplin and other famous actors appeared in short films encouraging the purchase of war bonds.
How War Bonds Work
War bonds are sold at less than face value, and buyers receive the full face value plus interest upon maturity. Historically, the rate of return on war bonds has not been lower than those of traditional bonds. War bonds from World War II, or Series E bonds, were supposed to have a maturity of 10 years, but they were granted an interest extension as long as 30 or 40 years, depending on the size.
Series E bonds were sold at 75% of face value and had a 2.9% interest rate, compounded semiannually. There were five available denominations to begin:
Later, the government would add $5,000 and $10,000 options for wealthier investors. If you wanted a $1,000 war bond, you could purchase it for $750; $500 for $375; or $100 for $75, for example.
Two memorial denomination amounts were also added: $200 for President Roosevelt and $75 for President Kennedy.
The final round of Series E bonds stopped earning interest in 2010. Those who still held Series E war bonds in 1960 could swap their original bonds for Series H bonds, thereby deferring any tax liability until the new bonds matured. Series H bonds stopped paying interest in 2009.
If you happen to possess Series E war bonds, you can go to your bank and redeem them for cash. The U.S. Treasury Department has a helpful calculator to determine how much your Series E bonds are worth today. According to the calculator, a $1,000 Series E bond purchased at $750 was worth $9,304.40 as of September 2020. A $10,000 war bond purchased at $7,500 was worth $93,044.
Relatively speaking, war bonds were not particularly lucrative investments. For perspective, a $1,000 investment into the S&P 500 in August 1941 was worth $1.98 million at the end of August 2020.
If you own old paper bonds, you may want to see what you could earn by selling them to a collector. While a collector would not be able to redeem them, they may see value in keeping them as a piece of history and offer you more than you’d get by cashing them in at a bank.
During World War II, the U.S. spent nearly four years at war, requiring the services of millions of soldiers, and the manufacturing of countless ships, aircraft carriers, tanks, weapons, and other equipment and supplies—a cost estimated to be around $4.1 trillion if adjusted for today's dollars.
The U.S. needed to raise funds quickly and did so largely by selling war bonds. The government urged citizens to purchase these war bonds as a matter of patriotic duty, and more than 85 million Americans complied. During World War II, Americans purchased $185.7 billion worth of war bonds.
By contrast, more recent wars, including the conflicts in Iraq and Afghanistan, were primarily financed by increasing the nation's foreign debt.
- War bonds are debt sold by the government to fund military operations.
- Historically, the rate of return on war bonds has been about the same as those of traditional bonds.
- Though you can still redeem old paper bonds, they may be more valuable as collector's items.