Earn your certification as a Financial Modeling & Valuation Analyst (FMVA)™. Register today!

War Bonds

Bonds to finance military spending during wartime

What are War Bonds?

War Bonds are debt instrument (bonds) that are issued by governments to finance military operations and production in War Time. War Bonds tend to appeal to the sense of patriotism in individuals, who can even see their purchase as a civic duty. Whilst there have been a variety of different structures for War Bonds, they tend to be issued at a discount and with returns that are below their current market levels. During WW1, War Bonds were available for purchase for retail investors, and had a strong propaganda that accompanied their issuance,  they, therefore, exposed a large part of the population to bonds that probably were not aware of them beforehand.

During WW1 the United States Government issued Liberty Bonds, which were used to aid in the expensive costs of war. The issuance of the Liberty Bonds was coupled with a strong investment in propaganda to appeal to Americans patriotism. However, most of the bond purchases were done by banks and other financial institutions who saw them as appealing investment opportunities.

In modern times, Governments use bonds to mitigate inflation, by issuing bonds the government is actually reducing the Money Supply and therefore reducing inflation. So to finance Military operations, governments print more money and then use bonds to reduce the amount of money in the economy

 

War Bonds uses

 

War Bond History

World War I

War Bonds

During World War I (WW1), War bonds were made available to retail investors as well as wholesale investors, with the purpose of raising enough capital to finance the governments’ increased military expenditures. There was a strong propaganda campaign to appeal to the nation’s sense of patriotism. Between 1917 and 1919, the USA government raised over 20 billion dollars through the issuance of four different Liberty Bondsthat were sold to both retail and wholesale investors.  The first issuance of the Liberty Bonds was not well received, and the bonds often traded below its par value. The Bonds were later re-issued at higher interest rates, as an attempt to solve the bond sales problem. The government also launched a marketing campaign to make the bonds more popular. Famous celebrities at the time such as Charlie Chaplin participated in the campaign to try and popularize the bonds to the general public. Although the campaign was not entirely successful, it introduced the notion of financial securities to a large number of people for the first time. In the end, the Liberty Bonds were mostly bought by wholesale investors and financial institutions for their investment opportunity, and not by retail investors as a patriotic civic duty.

 

World War II

During WWII the United States issued War Bonds that were labeled Defence Bonds. They were later relabelled War Bonds, after the attacks on Pearl Harbor. The War bonds sold in the USA helped the government raise about $185 billion, and was bought by over 84 million Americans. There was a nation-wide effort to advertise the bond, from sports events to Radio show promotions. Purchases of the Bonds was largely linked to patriotism and to the feeling of “doing their part” in the War.

 

Modern-day War Bonds

One of the mechanisms that governments use nowadays to finance increases in Military Spending, is by printing more money. The caveat of printing more money is that this increase in the money supply leads to inflationary pressure. To mitigate the effects of inflation, the government issues bonds, which then reduces the money supply and reduces inflationary pressure. This improves the speed that the government has capital readily available for military spending.

 

How War Bonds Work

There is never enough time or preparation for wartime. Generally, in times of crises, Governments need quick access to large amounts of Capital. War Bonds are a way for the government to borrow from their population to finance the increased military spending during wartime. Hence they are popular financial instruments during wartime, which tend to be correlated with inflationary periods due to increased spending.

War bonds work just like a regular government bond, however, they sometimes charge a lower interest rate than the prevailing market rates. This is due to the sense of pride of making an investment in your country during a fragile period such as that of war. A bond is a fixed income debt security, with a recurring payment of interest, for a predetermined period of time. Once the predetermined period of time gets to its end, the principal payment is then repaid.

 

Additional Resources

To learn more about fixed income concepts check out the fixed income fundamentals course below, please check out CFI’s additional resources:

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)™ by completing CFI’s online financial modeling classes and training program!