In a recent development, the Ukrainian army has raised over $277 million through the selling of 'War Bonds'. Following a drop in the price of government bonds in the country, Ukraine's Finance Ministry announced the issuance of these special bonds.
"In the face of Russian Federation military aggression, the Ministry of Finance gives residents, businesses, and foreign investors the opportunity to assist Ukraine's budget by investing in military government bonds," Ukraine's Ministry of Finance announced on Twitter.
But what exactly are these war bonds you may ask?
War bonds are specific financial instruments issued by a country's government to fund military operations during a current war or crisis. The bonds often have a lower interest rate than other bonds. As a result, investors are urged to show their patriotism.
The bonds are frequently issued at a discount because they do not pay interest. They are exchanged for cash at face value. The investor's revenue is the difference between the face value and discounted pricing. During WWII, these bonds were commonly used.
Why is Ukraine selling war bonds?
The move is part of a larger crowdfunding campaign to help Ukraine tap into domestic and international support as it fights Russian forces. The country's poor finances have long relied on IMF assistance, and the coronavirus outbreak has dealt a further blow to the country's finances.
After Russia invaded, its credit ratings were further downgraded to non-investment grade, or junk, meaning that many large institutional investors are unable to purchase its debt.
On March 1, the first war bonds were auctioned, yielding 11% and having a par value of 1,000 hryvnias, or about $33. In comparison, the expected yield on normal Ukraine one-year bonds traded in the secondary market is 37.8%.
On March 8, the administration intended to sell more war bonds to raise funds for military equipment as well as humanitarian help like clothing and blankets. Ukraine's debt leader, Yury Butsa, said that the government may issue foreign-currency bonds as well.
History of War Bonds
War bonds were first issued as Liberty Bonds in 1917 to fund the United States government's participation in World War I. They were originally known as defence bonds. The government raised $21.5 billion dollars for its war operations by selling these bonds. The United States entered world war II after the Japanese attack on Pearl Harbor on December 7, 1941, and defence bonds were renamed, war bonds.
Over 80 million Americans bought war bonds, bringing in more than $180 billion in revenue. Depending on the year they were released, the bonds sold for 50 percent to 75 percent of their face value and had denominations ranging from $10 to $1,000.
Other countries, including Canada, Germany, the United Kingdom, and Austria-Hungary, issued war bonds in addition to the United States.
The War Advertising Council in the United States advocated voluntary bond purchases. Purchases of war bonds were motivated by patriotism and conscience, as these bonds gave a lower rate of return than the market's prevailing interest rates.
To reach the American people, advertisements for the bonds were broadcast on radio stations, newspapers, magazines, and newsreels in movie theatres. Stamps for ten cents were also sold by the Girl Scouts. As part of the advertising campaign for war bonds, Norman Rockwell painted many paintings. Bette Davis and Rita Hayworth, among others, toured the country to promote war bonds. People could save up for war bonds by contributing 25 cents every time they made a contribution.
Pros and Cons of War Bonds
War Bonds were available for purchase at a discount to their face value.
The United States government-backed War Bonds.
By assisting the country during times of war, investors felt a sense of pride and patriotism.
Interest was paid at a lower rate than other securities on the market.
War bonds did not pay interest for the duration of their lives.
War Bonds, like any other security, pose the risk of a loss if sold before maturity for less than the purchase price.
Therefore, war bonds are notoriously volatile because they're frequently sold at a time when a country's economic and political fortunes — or even its very existence — are at their most precarious. When dealing with such scenarios, investors must increasingly be conscious of environmental, social, and governance rules.