War bonds were issued by the U.S. government to finance World War II. Previously called "Defense Bonds", almost $1 billion dollars' worth were sold to support the country's effort. Although they paid a rate that was below what an investor could receive elsewhere, they were a huge success. Advertising agencies and Hollywood celebrities contributed their time and talent to sell them, imploring citizens to get behind the country's war effort.
How War Bond Were Sold
War bonds were sold in increments of $25, and were done so at a discount. For every bond you purchased, you would pay $18.75, and the most any citizen could buy was $20,000. At the end of 10 years, you could redeem them for their face value.
Why They Were Sold
When World War II began, the country was fully employed and inflation was a problem. That situation resulted in the rationing of items critical to the war effort. By selling war bonds, the U.S. government not only would be able to better finance the war, it also took currency out of circulation that lessened the effect of inflation.
How to Determine a War Bond's Value
War bonds, or Series E Saving Bonds as they were subsequently called, accrued interest until June 30, 1980, when they were replaced by Series EE Saving Bonds. If you had war bonds that were issued in 1940, they were worth about 3.6 times their face value. For example, if you acquired $5,000 worth of war bonds from an estate, they would be worth about $18,000 now. They stopped increasing in value when they were replaced in 1980.
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War Bonds May Be Taxable
If you inherited the war bonds, most likely the income tax was paid by that person's estate. But, if you have simply uncovered their existence amount your own assets, or they were a gift from someone, you may owe income tax on them when they are redeemed. For example, if you are in the 30% tax bracket, and you redeem $10,000 worth of war bonds at face value that are actually worth about $36,000, you will pay about $8,000 in federal tax. In addition, you will also have to pay state income tax on the sale.
If you have come into possession of war bonds, note that they haven't been earning interest since the middle of 1980. So had they been redeemed then and invested in common stocks that have averaged about an 8% annual return, $36,000 worth of War Bonds would have been worth over $300,000 after 30 years.