The UK government is to repay part of the nation’s first world war debt – 100 years since the start of the war.

As Europe marks the centenary of the Great War, the Treasury said it would pay off £218m from a 4% consolidated loan next February, as part of a redemption of bonds stretching as far back as the 18th century. They also relate to the South Sea Bubble crisis of 1720, the Napoleonic and Crimean wars and the Irish potato famine.

Almost £2bn of first world war debt remains, and the government said it was looking into the practicalities of repaying it in full.

The “4% consols” were issued in 1927 by Winston Churchill, then chancellor, to refinance national war bonds originating from the first world war. The government’s Debt Management Office (DMO) estimates that the nation has paid £1.26bn in interest on these bonds since 1927.

Barclays bond strategist Moyeen Islam said: “For those of us who love the gilt market, it’s a sad day – there’s a few old-timers crying in the corner. But it’s symbolic more than anything.”

The national war bonds, which paid out a rate of interest of 5%, were issued in 1917 as the government sought to raise more money to finance the ongoing cost of the first world war, which started with the issue of the first war loan in November 1914. The bonds were sold to private investors in 1917 with the advertisement: “If you cannot fight, you can help your country by investing all you can in 5 per cent Exchequer Bonds ... Unlike the soldier, the investor runs no risk.”

The Spectator wrote at the time: “It is the people of Great Britain who must provide the cash with which to finance the war, and there is little reason to doubt that they can do it if only they will. A large part of the nation, instead of being impoverished by the war, has been enriched.”

In addition to the war bonds, some of the debt being repaid dates as far back as the eighteenth century. In 1853, William Gladstone, then chancellor, consolidated the capital stock of the South Sea Company which had collapsed in the infamous South Sea Bubble financial crisis of 1720. And in 1888, then chancellor, George Goschen, converted bonds first issued in 1752 which were later used to finance the Napoleonic and Crimean wars, the Slavery Abolition Act (1835) and the Irish Distress Loan (1847). This debt will be repaid through the redemption of the 4% consols.

Most of the bonds are owned by small investors. Of the 11,200 registered holders, 7,700 investors hold less than £1000 nominal, and 92% of holders own less than £10,000 each.

This is the first time in more than 60 years that a chancellor has redeemed an undated gilt of this sort. The 4% consol is one of eight undated government bonds outstanding. The bonds are known as perpetuals because they have no redemption date.

George Osborne, the chancellor, said: “The fact that we will no longer have to pay the high rate of interest on these gilts means that, most important of all, today’s decision represents great value for money for the taxpayer. We will go on working through our plan that is gripping the public finances and delivering a brighter economic future.”

On Twitter, he said: “We’ll redeem £218m of 4% consols, including debts incurred because of South Sea Bubble. Another financial crisis we’re clearing up after ...”

Investors have been paying renewed attention to bonds issued to pay for the first world war, partly because of the 100th anniversary of the war but also because their coupon, or interest rate, is attractive compared with the depressed returns on ordinary gilts.

Toby Nangle, a fund manager at Threadneedle Asset Management, has been lobbying the DMO to pay off the bigger perpetual first world war bond that is now under review. That bond, called War Loan, is worth £1.94bn and pays 3.5% to investors. It is the most widely held gilt and has about 125,000 mainly retail investors. Threadneedle is the second-biggest holder of the bond in its mutual funds after Fidelity and has been building that position since June.

Nangle said the government’s decision to repay the consolidated loan was a “great example of pragmatic and attentive debt management on the part of the UK government”. He added: “I hope that this move is the first of many to cut the interest bill and save taxpayers money.”

Nangle has calculated that the government could save more than £300m if it pays off the War Loan bonds at face value of £100 each, which it has the right to do with 90 days’ notice. He argued the saving would be about the same as the amount the government will make from selling its stake in Eurotunnel, announced with the intention of reducing government debt this month.

Ian Spreadbury, portfolio manager at Fidelity, said: “There is clearly an economic incentive for the Treasury to redeem the War Loan and refinance it through existing gilts at a lower yield.” Its coupon of 3.5% is expensive, especially considering yields on long-dated gilts maturing in 2068 are about 2.95%. The War Loan currently trades below par at about £92 with a yield of 3.8%.

“Ahead of the election, one challenge is political as there is a long tail of individual holders of the War Loan that would be affected by any decision to redeem it. It may also be administratively complex and expensive,” he said.

For long periods, high inflation depressed the War Loan’s market value meaning the government would have lost money by buying the bonds back. But, with the bond trading at a few pounds below its callable value, Nangle has argued it makes sense for the government to call it in. The government could then issue a new bond paying less than 3.5% saving money on interest payments while, he admits, allowing his clients to make money.

“It would absolutely be in the short-term interests of my clients to have this called because it would be a higher price than the price in the market,” Nangle told the Guardian last week. But he said his clients’ profit would be a byproduct of a sensible deal for the government. “It wouldn’t be rewarding the City or anything like that,” he said.