Bond Investment Introduction: Essential Concepts and Practical Tips Every Beginner Investor Must Know

Are you interested in increasing your financial assets but unsure where to start? If the interest rates on bank deposits feel disappointing and stock market volatility seems intimidating, considering ‘bonds’ might be a good option. Bonds offer better returns than savings accounts and lower risk than stocks, making them increasingly popular among investors seeking a balanced asset growth strategy.

What Are Bonds?

In simple terms, bonds are like ‘loans’ where governments, public enterprises, financial institutions, and corporations raise funds by promising investors, “We will borrow this money until (” or “We will pay back this amount by ).”

When you buy a bond, you become a bondholder providing funds to the issuer, and in return, you receive interest over a set period and get your principal back at maturity. Basically, it’s a relationship where you lend money and earn interest.

As of 2025, bonds are receiving special attention in the financial markets. For example, the annual yield on 3-year government bonds issued by the Korean government is about 3.3%, which is higher than bank savings accounts and backed by government credit, ensuring stability. Additionally, new products like blockchain-based digital bonds and ESG bonds focusing on environmental and social responsibility are continuously being introduced, broadening investment options.

Five Key Features of Bonds

To understand bond investing properly, you need to grasp five main characteristics.

1. Stability
The biggest appeal of bonds is stability. The higher the credit rating of the issuer, the lower the risk of repayment failure. Sovereign bonds or AAA-rated corporate bonds offer almost no risk of principal loss, providing safety comparable to savings accounts.

2. Regular Interest Income
Most bonds pay interest periodically, typically every 3 to 6 months. As of 2025, the interest rate on 3-year treasury bonds is around 2.3–2.4%, while corporate bonds with higher credit ratings can offer 4–6% interest.

3. Liquidity
Bonds can be freely bought and sold in the market before maturity. Like savings accounts, they can be cashed out anytime without early withdrawal penalties. In fact, the average daily trading volume in the Korean bond market in Q1 2025 is about 25 trillion won, indicating very active trading.

4. Price Fluctuations with Interest Rate Changes
Bond prices move inversely to market interest rates. When rates fall, bond prices rise; when rates rise, prices fall. Understanding this can help you profit from price differences.

5. Tax Benefits
For individual investors, interest income from bonds is taxed, but capital gains from trading bonds are tax-exempt. Certain products like ESG bonds may also offer additional tax benefits.

Bonds vs. Savings Accounts: Which Should You Choose?

At first glance, both seem to offer interest, but their mechanisms are entirely different.

Features of Savings Accounts
Money is deposited in a bank, and you receive a fixed interest over the agreed period. The deposit is protected up to 50 million won by the deposit insurance scheme, which is set to increase to 100 million won this year. However, early withdrawal may result in interest loss.

Features of Bonds
Repayment depends on the issuer’s creditworthiness, and bonds can be traded freely before maturity. There are no early redemption penalties, and you can potentially profit from falling interest rates. However, there is a risk of principal loss depending on the issuer’s financial health.

Understanding Different Types of Bonds

Bonds are classified based on the issuer, maturity, and interest payment method.

Government Bonds (Sovereign Bonds)
Issued directly by the government, these are the safest with the highest credit rating, but generally offer lower yields.

Special Bonds
Issued by public enterprises like Korea Electric Power Corporation or Korea Road Corporation. They are riskier than government bonds but offer higher interest than sovereign bonds.

Local Government Bonds
Issued by local authorities, slightly riskier than government bonds but still considered stable investments.

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

Corporate Bonds
Issued by private companies. Yields vary significantly based on credit ratings, so it’s important to review the issuer’s financial health before investing.

U.S. Treasury Bonds
Globally recognized safe assets, offering the benefit of dollar holdings and exchange rate risk diversification, often included in global investment strategies.

Key Bond Yield Data for 2025

Since bond types vary widely, choosing products aligned with your investment goals and cash flow plans is crucial.

Which Investors Are Suitable for Bonds?

Those needing stable cash flow
Regular interest payments provide predictable income annually or semi-annually.

Retirement planners
Bonds are a good option for those seeking higher returns than savings accounts without the sharp price swings of stocks.

Investors worried about stock market volatility
Including bonds in your portfolio can reduce overall volatility and manage risk effectively. Many experts recommend bond investments for balanced asset allocation.

Tax-saving and global diversification enthusiasts
Interest from bonds is tax-free, and certain products like ESG bonds offer additional benefits. Investing in overseas bonds like U.S. Treasuries can also diversify currency risk.

Major Risks to Watch When Investing in Bonds

While bonds are considered relatively safe, they are not risk-free. Here are three key risks every beginner should understand and how to manage them.

Interest Rate Risk: Price Decline When Rates Rise
When central banks raise benchmark rates, existing bond prices fall. For example, buying a bond with a 3% yield when market rates rise to 4% will decrease its market value. When rate hikes are expected, short-term bonds or floating-rate bonds are wiser choices.

Issuer Credit Deterioration or Default
If a company issuing bonds faces financial difficulties or bankruptcy, you may not recover your principal. Lower-rated bonds carry higher risk. Conservative investors should prioritize AAA or AA rated bonds.

Currency Risk in Overseas Bonds
Foreign bonds like U.S. Treasuries are usually traded in dollars. Fluctuations in the USD/KRW exchange rate can affect returns. If the dollar weakens, your dollar-denominated interest may translate into a loss in won. To mitigate this, consider hedged products or allocate only a portion of your assets to foreign currency bonds.

How to Start Investing in Bonds?

Currently, in Korea, there are three main ways to invest in bonds:

Direct Purchase of Individual Bonds
You can buy government, special, or corporate bonds directly through securities firms’ HTS/MTS, bank branches, or online platforms. The advantage is that interest income is taxed, but capital gains from trading before maturity are tax-exempt.

Bond Funds
Invest in funds managed by asset management companies that diversify across multiple bonds. This allows small investments in various bonds but involves management fees.

Bond ETFs (Exchange-Traded Funds)
Trade on stock exchanges like stocks, with real-time prices. They offer low fees, high liquidity, and effective diversification.

Frequently Asked Questions About Bond Investing

Q. Are bonds as safe as deposits?
A. Bonds are not covered by deposit insurance, and if the issuer goes bankrupt, you may lose your principal. Subordinated bonds are even riskier. Always check the issuer’s credit rating and product structure before investing.

Q. Besides credit ratings, what else should I consider?
A. Review product risk grades, liquidity, maturity structure, prospectus, and credit evaluation reports. Risk grades reflect ease of redemption and complexity.

Q. How do bond prices move with interest rate changes?
A. Bond prices and market rates move inversely. When rates rise, prices fall; when rates fall, prices rise. If you plan to sell before maturity, interest rate outlooks are very important.

Q. How should I match bond maturities with my investment horizon?
A. Choose bonds with maturities aligned with your goals. Short-term bonds for near-term needs, long-term bonds for longer horizons. Be cautious with OTC bonds, as early selling may be difficult or unfavorable; only invest with funds you can hold to maturity.

Q. How can I achieve diversification with bonds?
A. Bonds have low correlation with stocks, so including them in your portfolio can reduce overall volatility and provide stable returns. Combining bonds and stocks during interest rate changes is an effective risk management strategy.

Q. How do I compare yields across bonds?
A. Compare bonds with similar credit ratings and maturities. Use sources like the Korea Financial Investment Association’s Bond Information Center. Consider not only interest rates but also actual investment conditions and liquidity.

Q. What are ESG bonds?
A. ESG bonds are issued to promote environmental sustainability, social responsibility, and transparent management. Investors can realize social value and sometimes receive additional tax benefits or government support. ESG bonds are a growing global trend with long-term growth potential.

Conclusion: Bonds as a Wise Asset Growth Strategy

With rising expectations of interest rate cuts, bond prices are expected to increase. Now may be an ideal time to consider bond investments seriously. Bonds are perfect for investors seeking higher returns than savings accounts while maintaining lower volatility than stocks to protect assets.

If you are new to bonds, start with safer products like government bonds or bond ETFs, then diversify into corporate and overseas bonds as your experience and understanding grow. Systematic learning and careful selection will make bonds a reliable pillar in your long-term asset growth strategy.