War Bonds Explained: History, Features, Pros & Cons

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War bonds are debt securities a government sells to the public to pay for military operations during a conflict. Buying one is lending money to the state: you pay now, and the government promises to repay you later, usually with a modest return. In the United States, the World War II war bond (the Series E savings bond) was sold at a discount to its face value and paid nothing until it was redeemed, which made it work like a zero-coupon bond.

How War Bonds Work

The buyer hands over a sum today, and the issuing government commits to pay back a larger, stated amount on a set date. The gap between the purchase price and the face value is the investor’s return.

The U.S. WWII version had several defining traits:

• Discount pricing. Bonds were bought below face value, typically at 50% to 75% of it, and redeemed at full face value at maturity.
• No coupons. Unlike a standard Treasury bond, a war bond paid no interest along the way. All the return came at the end.
• Small denominations. Face values ran from $10 to $1,000, depending on the year of issue. Because of these low price points, they were sometimes called “baby bonds,” and they were priced for households rather than banks.
• Nontransferable. Only the registered owner could redeem the bond. It could not be sold to another investor on a secondary market, so its price did not swing with interest rates the way a marketable bond’s does.
• Backed by the U.S. government. Repayment depended on the federal government, not on any company or bank.

Worked example: the $25 bond

A buyer paid $18.75 for the best-known WWII denomination, a bond with a $25 face value and a 10-year maturity.

• Gain at maturity: $25.00 − $18.75 = $6.25
• Total return: $6.25 ÷ $18.75 = 33.3% over 10 years
• Annualized return: (25 ÷ 18.75)^(1/10) − 1 ≈ 2.9% per year

That 2.9% is the compound annual rate, the same idea as CAGR, and it equals the bond’s yield to maturity for a buyer who held to the 10-year date. It assumes the bond was held the full term. Cashing in early produced a smaller payout, because the value climbed toward $25 in steps over the life of the bond.

What happened after the original maturity

Congress extended the earning period so bonds kept accruing interest beyond their original 10-year maturity. Series E bonds sold from 1941 through 1965 could earn interest for up to 40 years, and later issues earned for shorter periods. Series E sales continued after the war until Series EE bonds replaced them in 1980, and every Series E bond has now passed its final maturity date.

Why Governments Issued War Bonds

War is expensive and arrives faster than tax systems can adjust. A government has three broad ways to pay: raise taxes, create money, or borrow. Heavy taxation is politically difficult and slow to collect. Creating money risks inflation. War bonds let a government borrow directly from its own population, often at a lower cost than an ordinary sovereign bond issue.

They also did a second job. During WWII, wages rose while consumer goods were rationed, which left households with cash and little to buy. Money flowing into bonds instead of scarce goods eased upward pressure on prices.

How they were sold

Because the yield sat below prevailing market rates, governments sold war bonds as a civic duty rather than a bargain. In the U.S., the War Finance Committee oversaw sales and the War Advertising Council ran promotion through radio, newspapers, magazines and theater newsreels. Hollywood stars such as Bette Davis and Rita Hayworth toured the country for bond drives. Poster campaigns linked purchases directly to the fighting with slogans like “Stop air raids, buy bonds.”

The campaigns reached people with very little to spare. Savers could build toward a bond 25 cents at a time with savings stamps, and Girl Scouts sold 10-cent stamps. Once a stamp book was full, it could be exchanged for a bond.

Historical Examples

World War I (United States). The U.S. financed its entry into WWI with Liberty Bonds, first issued in 1917. Unlike the later war bonds, Liberty Bonds paid periodic interest. The government raised $21.5 billion through these sales.

World War II (United States). Defense Bonds went on sale in 1941 and were renamed War Bonds after the attack on Pearl Harbor on December 7, 1941. More than 80 million Americans bought them, and sales brought in over $180 billion.

Other countries. Canada, the United Kingdom, Germany and Austria-Hungary all issued war bonds. The British “war loan” bonds of WWI were a different design: long-dated, interest-paying government stock rather than discount savings bonds. The UK’s 5% War Loan was converted to a 3.5% War Loan in 1932, carried no fixed redemption date, and was finally repaid in 2015, about a century after the war it funded. Germany’s WWI war bonds lost most of their value when the country lost the war and the mark collapsed in the hyperinflation that followed.

Ukraine (2022). After Russia’s 2022 invasion, Ukraine issued what it calls military bonds. On March 1, 2022, the government announced it had raised $270 million from a one-year bond yielding 11%, and successive issues brought the total to nearly $1 billion. These bonds pay a market-level interest rate, unlike the below-market WWII issues. Ukrainian citizens and residents buy them through a Ukraine-licensed bank or broker. Foreign institutional investors can participate as well, but availability to foreign retail investors has not been established.

Pros and Cons of War Bonds

Advantages

• Bought below face value, with a known payout at maturity
• Backed by the issuing government
• Small denominations made them accessible to almost any household
• Gave civilians a direct way to support the war effort

Disadvantages

• Yields were lower than other securities paid
• No interest payments during the life of the bond
• Nontransferable, so money was tied up until redemption
• Repayment depended on the issuing state surviving and honoring the debt

Two of these disadvantages deserve more weight. The first is inflation. A fixed 2.9% nominal return is only as good as the purchasing power left at the end, and high-inflation years in the 1940s, along with some postwar years, cut into what holders actually earned. The second is political risk. A war bond is only as reliable as the government behind it, as the German case shows. Some speculators have bought the debt of a side that looked to be losing, betting on a reversal, which is a wager on the war’s outcome rather than a fixed-income investment.

For the issuing country, the cost comes later. Money borrowed during a war must be repaid after it, and heavy borrowing can leave a debt burden the government struggles to carry.

War Bonds vs. Related Terms

• War bond vs. savings bond. U.S. WWII war bonds were Series E savings bonds sold under a wartime name and campaign. Today’s Series EE and I bonds descend from them but are not war bonds.
• War bond vs. Treasury bond. A Treasury bond pays semiannual coupons and trades on the open market, so its price moves with interest rates. A WWII war bond did neither.
• War bond vs. Liberty Bond. Liberty Bonds funded WWI and paid periodic interest, while the WWII war bonds were discount bonds with no coupons.
• War bond vs. war loan. In British usage, a war loan is long-dated, interest-bearing government stock, not a discount savings bond.

Cashing Out an Old War Bond

Yes, you can still cash a WWII war bond, but its redemption value is not its face value. A Series E bond is worth its purchase price plus all the interest it accrued up to final maturity, so a bond held through its extensions is worth more than the number printed on it. After final maturity the value stops growing, so holding it longer only loses purchasing power.

The U.S. Treasury offers an online savings bond calculator that shows the current redemption value of paper bonds. Interest on savings bonds is subject to federal income tax but exempt from state and local income tax. Owners who deferred reporting should know that the interest becomes reportable for the year the bond reaches final maturity, whether or not it has been cashed.

The Bottom Line

Anyone holding an old Series E bond can still cash it for its purchase price plus all interest accrued through final maturity, which exceeds the printed face value. Every Series E bond has stopped earning, so holding one longer only loses purchasing power. The accrued interest is reportable for federal income tax in the year of final maturity, even if the bond was never cashed.