What it is:
A war bond is a bond issued to finance war.
How it works (Example):
Let's say that Country X attacks Country Y. Country Y has a smaller military and defense systems, but wants to defend itself. It decides to enlarge its military, beef up its satellite and intelligence systems, and buy planes and weapons. These things cost billions of dollars that Country Y does not have in its treasury at the moment, so it borrows the money from its citizens (and foreign investors) by issuing war bonds. The government uses the proceeds to fund its defense initiatives, and because of its larger, faster, more capable military efforts, it is able to defeat Country X.
Why it Matters:
The United States issued war bonds during World War II as a way to raise face value and did not pay interest. They were repaid at . Many people bought the bonds (that is, lent the government money) to show their patriotism.