The Basics to Practical Bond Investing: Everything Beginners Need to Know

Are you considering starting personal finance but unsure where to begin? Learning about bonds, which have recently gained attention in the financial markets, is also a good choice. Bonds offer higher returns than regular savings accounts while providing lower risk than stocks, making them popular among investors seeking a balance of stability and profitability.

Definition of Bonds: Viewing Bonds as Investment Assets

A bond is a financial product issued by various entities such as governments, corporations, and public institutions to raise necessary funds. When an investor purchases a bond, they receive regular interest payments until the maturity date, at which point they are entitled to receive the principal back.

As of 2025, the characteristics of the bond market include the Korean 3-year treasury bond with an annual yield of around 3.3%, making it more attractive than bank savings accounts. Additionally, innovative products like blockchain-based digital bonds and ESG bonds are being introduced, greatly expanding investment options.

Five Key Attributes of Bonds

1. Stability Based on Creditworthiness

The higher the credit rating of the issuing entity, the lower the risk of principal and interest repayment. Sovereign bonds or AAA-rated corporate bonds are considered very safe investments with minimal risk of principal loss.

2. Regular Interest Income

Most bonds pay interest every 3 to 6 months. As of 2025, the coupon rate for the 3-year treasury bond is around 2.3~2.4%, and corporate bonds with higher credit ratings can offer interest rates of 4~6%.

3. Excellent Liquidity

Bonds can be traded freely in both on-market and off-market environments before maturity. Unlike fixed deposits, they can be liquidated in the market when needed, which is a significant advantage. In fact, the average daily trading volume of Korean bonds in the first quarter of 2025 reached about 25 trillion won, indicating active trading.

4. Price Fluctuations Due to Interest Rate Changes

Bond prices are affected by market interest rate movements. When rates fall, existing bonds’ prices tend to rise; when rates rise, prices tend to fall. Investors can leverage this to seek capital gains based on interest rate outlooks.

5. Tax Benefits

When individual investors invest directly in bonds, only interest income is taxed, while capital gains are tax-exempt. ESG bonds may also offer additional tax benefits.

Bonds vs. Fixed Deposits: Which Product Suits You?

Both products provide interest income, but structurally they are entirely different. Fixed deposits are ‘principal guaranteed’ products where funds are deposited with a bank and held until maturity, with principal protected up to 50 million won under the Deposit Protection Act.

In contrast, bonds’ principal repayment depends on the creditworthiness of the issuer, and they can be traded in the market before maturity. When interest rates decline, investors can also expect capital gains from bond trading, offering more profit opportunities than fixed deposits.

Characteristics and Yields of Different Types of Bonds

Bonds are classified into various types based on the issuer.

Government Bonds: Issued by the government, these have the highest credit rating and are very safe, but generally offer lower yields.

Special Bonds: Issued by public enterprises like Korea Electric Power Corporation and Korea Road Corporation, offering higher yields with relatively stable risk.

Municipal Bonds: Issued by local governments, slightly riskier than government bonds but still considered stable investments.

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

Corporate Bonds: Issued by companies, with yields varying significantly based on credit ratings; thorough credit assessment is essential before investing.

Foreign Bonds: Considered global safe assets like U.S. Treasury bonds, offering diversification in dollar assets and potential currency hedging benefits, attracting international investors.

2025 Bond Yield Overview

Which Investors Are Suitable for Bonds

Investors needing cash flow: Regular interest payments provide predictable income.

Retirement investors: Seek higher returns than deposits without exposure to large price fluctuations typical of stocks.

Investors aiming to stabilize their portfolio: Bonds have low correlation with stocks, helping to reduce overall portfolio volatility when included.

Investors interested in tax optimization: Capital gains are tax-exempt, and products like ESG bonds may offer additional tax benefits.

Investors considering global diversification: Investing in foreign bonds like U.S. Treasuries can help hedge against currency risk and diversify assets.

Risks to Avoid When Investing in Bonds

Price Decline Due to Rising Interest Rates

When central banks raise benchmark interest rates, existing bonds’ prices may fall. For example, holding a bond with a 3% coupon when market rates rise to 4% reduces its attractiveness, causing its price to drop. If rate hikes are expected, choosing short-term or floating-rate bonds is prudent.

Deterioration of Issuer’s Creditworthiness

Holding corporate bonds from companies whose financial health worsens may result in principal loss. Lower-rated bonds carry higher risks. Always review the issuer’s credit rating before investing.

Currency Risk in Foreign Bonds

Foreign bonds like U.S. Treasuries are traded in dollars, and exchange rate fluctuations can impact actual returns. A decline in the dollar’s value can lead to losses when converted back to won, even if interest is received. Consider currency hedging ETFs or diversification to mitigate this risk.

How to Start Bond Investing

Currently, bond investments can be made through three methods:

Direct Purchase of Individual Bonds: Bonds such as government, special, or corporate bonds can be bought directly via securities firms, banks, or financial platforms. Only interest income is taxed; capital gains are tax-free before maturity.

Bond Funds: Investing in funds managed by asset managers that diversify across multiple bonds. This allows for diversification with small amounts but involves fund management fees.

Bond ETFs: Traded on stock exchanges like stocks, offering real-time trading, low fees, high liquidity, and excellent diversification.

Starting Your Wise Bond Investment

With expectations of interest rate cuts rising, bond prices are likely to increase, making now an attractive time for investors seeking both stable income and risk diversification.

If you are new to bonds, start with safer products like government bonds or bond ETFs, then gradually expand your portfolio to include corporate bonds or foreign bonds. Choosing bonds aligned with your investment goals and time horizon will make bonds a reliable pillar for wealth growth.

Key Q&A for Bond Beginners

Are bonds completely safe like deposits?

Bonds are not protected by deposit insurance, so if the issuer goes bankrupt, principal loss can occur. Subordinated bonds are especially risky due to lower repayment priority. Always check the issuer’s credit rating and product structure before investing.

Besides credit ratings, what else should I consider?

Important factors include product risk grade, liquidity, maturity structure, prospectus, and credit evaluation reports. The product risk grade reflects ease of redemption and complexity, so review carefully.

How does interest rate fluctuation affect bond prices?

Bond prices and market interest rates move inversely. When rates rise, bond prices fall; when rates fall, prices rise. The prevailing interest rate at the time of sale before maturity significantly impacts actual returns. Always consider interest rate outlooks.

How should I match maturity and investment period?

Choose bonds with maturities aligned with your financial goals and cash flow needs. Use short-term bonds for short-term funds and long-term bonds for long-term investments. Be cautious with OTC bonds, as early sale may involve unfavorable prices; invest with funds you can hold until maturity.

Can bonds stabilize my portfolio?

Yes, bonds have low correlation with stocks, so including them can reduce overall portfolio volatility and provide stable returns. During interest rate changes, a balanced mix of bonds and stocks can effectively manage risks.

What should I look at when comparing yields?

Compare yields among bonds with similar credit ratings and maturities. Use sources like the Korea Securities Depository Bond Information Center for comprehensive yield data. Don’t just look at interest rates; also consider investment conditions and liquidity.

What are ESG bonds?

ESG bonds are issued to promote environmental protection, social responsibility, and transparent management. Investors can realize social value while potentially receiving additional tax benefits or government support. ESG bonds are a growing trend with high long-term growth potential.