Essential Concepts and Implementation Strategies Every Beginner in Bond Investment Must Know

As the new year begins, many of you are thinking about increasing your assets, right? Then why not start with ‘bond investing’? Bond investments are gaining popularity among investors who seek both stable cash flow and reasonable returns.

Basics of Bond Investing: Issuers and Repayment Structures

A bond is a type of ‘debt instrument’ issued by governments, financial institutions, public enterprises, and private companies to raise funds from investors. Investors who purchase bonds receive regular interest income and get their principal back at maturity.

Looking at the bond investment market characteristics in 2025, it offers higher yields than traditional fixed deposits while showing much lower volatility compared to stocks. For example, the annual yield of the 3-year Korean government bond is around 3.3%, whereas bank fixed deposits are lower. At the same time, the government guarantees principal and interest repayment, making the credit risk very low.

Recently, innovative products like blockchain-based digital bonds and ESG bonds have been launched one after another, greatly expanding the options for bond investments.

Five Investment Attractions of Bond Investing

To understand bond investing properly, you need to clearly grasp its characteristics.

First, Security

The higher the credit rating of the issuing institution, the lower the repayment risk. High-grade bonds like AAA or AA offer safety comparable to deposits.

Second, Regular Cash Income

Most bonds pay interest periodically every 3 to 6 months. As of 2025, the 3-year government bond offers a coupon rate of about 2.3-2.4%, and highly rated corporate bonds can yield between 4-6%.

Third, Excellent Liquidity

Bonds can be freely traded in the market before maturity. In Q1 2025, the average daily trading volume of Korean bonds was about 25 trillion won, indicating sufficient liquidity.

Fourth, Profit Opportunities from Interest Rate Fluctuations

When market interest rates fall, existing bond prices rise; when rates rise, prices fall. Utilizing this interest rate volatility allows for capital gains through trading.

Fifth, Tax Benefits

Individual investors who invest directly in bonds are taxed only on interest income, while capital gains from trading are tax-exempt. Certain products like ESG bonds may offer additional tax benefits.

Bond Investing vs. Fixed Deposits: Which Product Is Better?

Both products provide regular income, but their structures and operations differ completely.

Fixed deposits are ‘principal guaranteed’ products managed by banks, paying the agreed interest at maturity. The deposit protection law covers up to 50 million won, which is set to increase to 100 million won this year.

Bond investing depends on the creditworthiness of the issuer, with principal repayment likelihood varying accordingly. However, bonds can be traded freely before maturity, and in a falling interest rate environment, capital gains are possible. There are no penalties for early termination, unlike deposits.

Main Types of Bonds and Yield Comparisons

Bond investments are classified based on issuer, credit rating, and maturity.

Government Bonds – Issued directly by the government, with the highest creditworthiness but relatively lower interest rates.

Special Bonds – Issued by public enterprises like Korea Electric Power Corporation or Korea Road Corporation, offering slightly higher yields than government bonds.

Local Bonds – Issued by local governments, riskier than government bonds but still relatively stable.

Financial Bonds – Issued by banks and financial institutions, highly liquid and suitable for short-term funds.

Corporate Bonds – Issued by corporations, with yields varying significantly based on credit ratings. Always check the company’s creditworthiness before investing.

U.S. Treasury Bonds – Recognized globally as a safe asset, offering diversification in dollar assets and potential currency hedging benefits.

2025 Key Bond Investment Yield Data

Choosing the right bond depends on understanding each type’s characteristics and aligning them with your investment goals and cash flow plans.

Who Should Consider Bond Investing?

Bond investing is especially suitable for those prioritizing stability.

If you need regular cash flow, bonds’ predictable interest payments can secure stable income. Retirees or those approaching retirement can pursue higher returns than deposits without exposing themselves to the sharp volatility of stocks.

If you want to balance your portfolio during volatile stock market periods, bonds are an effective asset allocation tool. They have much lower price volatility than stocks and provide fixed returns if held until maturity.

For tax savings or global asset diversification, you can leverage bond tax benefits and overseas bond investment opportunities. Investing in foreign bonds like U.S. Treasuries can also provide currency hedging benefits through dollar holdings.

Main Risks of Bond Investing and How to Respond

While bonds are considered relatively safe, there are risks that novice investors often overlook.

Rising Interest Rates Lead to Falling Bond Prices

If the Bank of Korea raises the base rate, existing bonds’ market prices may decline. For example, buying a bond with a 3% coupon when market rates rise to 4% makes the bond less attractive, causing its price to fall. During rate hikes, short-term bonds or floating-rate bonds are advisable.

Issuer’s Credit Deterioration

If the issuer’s financial health worsens or risks bankruptcy, you may not recover your principal. This risk is higher with lower-rated bonds. If you prefer risk aversion, prioritize bonds with very high credit ratings like AAA or AA.

Foreign Bond Currency Risk

Overseas bonds like U.S. Treasuries are traded in dollars, so exchange rate fluctuations can affect returns in won. A decline in dollar value can reduce your realized gains when converted back to won. To mitigate this, consider currency-hedged ETFs or limit your dollar asset exposure.

How to Start Bond Investing?

In Korea, in 2025, there are three main ways to start bond investing:

Direct Purchase of Individual Bonds

You can buy government bonds, special bonds, or corporate bonds directly through securities firms’ HTS, MTS, bank counters, or financial platforms. Only interest income tax applies; capital gains are tax-exempt if held to maturity.

Investing in Bond Funds

Join funds managed by asset managers that diversify across multiple bonds. This provides good diversification with small amounts of capital, though management fees apply.

Trading Bond ETFs

Trade on the stock exchange like stocks, with real-time buying and selling. Low fees, high liquidity, and automatic diversification are key advantages.

Key Q&A for Bond Beginners

Q. Are bonds guaranteed 100% principal like deposits?

A. No. Bonds are not covered by deposit insurance, and if the issuer goes bankrupt, you may lose your principal. Subordinated bonds especially have lower repayment priority and higher risk. Always review the issuer’s credit rating and product structure carefully before investing.

Q. Besides credit ratings, what else should I check?

A. Product risk grades, liquidity, maturity structure, prospectus, and credit evaluation reports are also important. The product risk grade assesses ease of redemption and complexity of the product structure.

Q. How do bond prices move with interest rate changes?

A. Bond prices and interest rates move inversely. When rates rise, bond prices fall; when rates fall, bond prices rise. The actual return can vary significantly depending on the timing of sale before maturity, so consider interest rate outlooks carefully.

Q. How should I match bond maturity with my investment period?

A. Choose bonds with maturities aligned with your financial goals. Short-term bonds for short-term funds; long-term bonds for long-term planning. Be cautious with less-liquid over-the-counter bonds, which may trade at unfavorable prices if sold early. Invest with funds that can hold until maturity if possible.

Q. How to achieve diversification with bonds?

A. Bonds have low correlation with stocks, so including them in your portfolio can significantly reduce overall volatility. Especially during interest rate changes, a balanced mix of bonds and stocks helps manage risk effectively.

Q. How to compare bond yields?

A. Compare yields among bonds with similar credit ratings and maturities. Use sources like the Korea Financial Investment Association’s Bond Information Center. Don’t just look at interest rates; consider actual investment conditions and tradability.

Q. What are ESG bonds?

A. ESG bonds are issued to promote environmental sustainability, social responsibility, and transparent governance. Investors can contribute to social value and may receive additional tax benefits or government support. They are a growing global trend with high long-term growth potential.

Conclusion: Protect and Grow Your Assets with Bonds

Recently, expectations of interest rate cuts have increased, raising interest in bond price appreciation. Now may be an ideal time to consider bond investments seriously.

Bond investing offers higher returns than deposits while providing lower risk than stocks, fulfilling the needs of investors seeking asset protection and growth.

If you’re new to bonds, start with safer products like government bonds or bond ETFs, then gradually expand your portfolio to include corporate and overseas bonds for diversification.