Bond investment: what are the key points beginners tend to overlook?

For those starting their financial planning, bonds are considered the “golden middle ground” between savings accounts and stocks. This is because they offer higher returns than savings accounts and lower volatility than stocks. But what exactly are bonds, and how should they be invested in? In this article, we will explore everything you need to know about bonds in the Korean financial market as of 2025, focusing on practical insights.

What Exactly Are Bonds?

In a nutshell, bonds are “marketable securities issued by governments, corporations, or public institutions that borrow money from investors, pay interest over a set period, and repay the principal at maturity.”

From an investor’s perspective, buying bonds means lending money to the issuer and receiving regular interest payments and the principal at maturity. Unlike savings accounts, bonds can be freely bought and sold in the market before maturity, which is a significant difference.

As of 2025, the Korean bond market is attracting attention from investors seeking stable returns. The annual yield on 3-year Korean government bonds is around 3.3%, higher than regular savings accounts, backed by the government’s guarantee of principal and interest. Recently, innovative products like blockchain-based digital bonds and ESG(Environmental, Social, and Governance) bonds are being launched, increasing options for investors.

The Five Key Aspects of Bond Investment

Before making investment decisions, you must understand five characteristics of bonds.

First, stability. The higher the credit rating, the lower the risk of principal loss. Government bonds or AAA-rated corporate bonds offer extremely low risk, providing safety comparable to savings accounts.

Second, regular cash flow. Most bonds pay interest every 3 to 6 months. As of 2025, the nominal yield on 3-year government bonds is about 2.3–2.4%, while high-credit corporate bonds can yield 4–6%.

Third, liquidity. Bonds can be traded freely before maturity. The average daily trading volume in the Korean bond market in Q1 2025 is about 25 trillion won, indicating active liquidity.

Fourth, interest rate sensitivity. Bond prices move inversely to market interest rates. When rates fall, bond prices rise; when rates rise, prices fall. This allows traders to profit from interest rate outlooks.

Fifth, tax efficiency. For individual investors, interest income is taxed, but gains from trading bonds before maturity are tax-exempt. ESG bonds may offer additional tax benefits.

Bonds vs. Fixed Deposits: What Investors Need to Know

Both bonds and fixed deposits pay interest, but their mechanisms differ significantly.

Fixed deposits are “principal guarantee” products where you deposit money with a bank and wait until maturity. Under deposit protection laws, up to 50 million won is currently guaranteed, with plans to increase to 100 million won this year. However, early withdrawal usually results in penalty interest reduction.

In contrast, bonds depend on the issuer’s creditworthiness for principal repayment but can be traded freely before maturity. During falling interest rate periods, investors can benefit not only from interest income but also from capital gains.

Comparison Table: Bonds vs. Fixed Deposits

Yields and Characteristics by Bond Type

To succeed in bond investing, understanding the differences among bond types is essential.

Government Bonds (Korea Treasury Bonds): Issued directly by the government, with the highest credit rating. Very safe but offer lower yields. Suitable as core assets for conservative investors.

Special Bonds: Issued by public enterprises like Korea Electric Power Corporation or Korea Road Corporation. Offer slightly higher yields with still high stability.

Local Bonds: Issued by local governments, with slightly more risk than national bonds but still considered stable.

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

Corporate Bonds: Issued by companies, with yields varying widely depending on credit ratings. Always check the issuer’s creditworthiness before investing.

Overseas Bonds (e.g., U.S. Treasuries): Recognized globally as safe assets. Diversify with dollar-denominated assets and benefit from currency hedging, useful for global portfolios.

Major Bond Yields in 2025

Notably, U.S. Treasuries are gaining popularity among Korean investors due to their status as global safe assets and dollar diversification.

Who Is Suitable for Bond Investment?

Bond investing is especially effective for certain investor profiles.

First, those who need regular cash flow. The periodic interest payments provide predictable income.

Second, retirees or those approaching retirement. Bonds do not experience large price swings like stocks and can generate returns exceeding savings accounts.

Third, investors uncomfortable with stock market volatility. Bonds have significantly lower price volatility and guarantee interest and principal at maturity, effectively reducing overall portfolio risk.

Fourth, investors seeking tax advantages and global diversification. Direct bond investments incur no capital gains tax, and investing in foreign bonds provides dollar assets and currency risk diversification.

Risks to Avoid When Investing in Bonds

While bonds are relatively stable, novice investors should be aware of three common risks.

First, rising interest rates cause bond prices to fall. When central banks hike rates, existing bonds with lower yields become less attractive, leading to price declines. For example, holding a bond with a 3% coupon when market rates rise to 4% will reduce its market value.

If rate hikes are expected, consider short-term or floating-rate bonds.

Second, issuer default risk. If a company issuing bonds goes bankrupt, you may lose your principal. Lower credit ratings mean higher risk.

To mitigate, prefer bonds with high credit ratings like AAA or AA, and thoroughly review prospectuses and credit evaluations.

Third, currency risk with foreign bonds. Foreign bonds are often dollar-denominated. Exchange rate fluctuations can impact returns; a weakening dollar can reduce your gains in local currency terms.

If currency risk concerns you, consider hedged ETFs or limit foreign bond exposure to diversify risk.

How to Start Bond Investing in 2025

In Korea, there are three main ways to begin bond investing:

First, direct purchase of individual bonds. You can buy government bonds, special bonds, or corporate bonds through securities firms’ HTS/MTS, bank branches, or financial platforms. Direct investment means only interest income is taxed; capital gains are tax-exempt before maturity.

Second, bond funds. Managed by asset managers, these funds invest in a diversified portfolio of bonds. They offer diversification with small amounts but involve management fees.

Third, bond ETFs (Exchange-Traded Funds). Traded on stock exchanges like stocks, offering low fees, high liquidity, and excellent diversification.

Checklist Before Investing in Bonds

Before investing, verify the following:

• Credit rating: Key indicator of issuer’s creditworthiness.
• Product risk grade: Reflects liquidity, complexity, and other risks.
• Liquidity: Ensure you can sell before maturity if needed.
• Maturity structure: Match with your investment horizon and cash flow needs.
• Prospectus and credit evaluation: Review issuer’s financial health, outlook, and risks thoroughly.

Diversifying Your Portfolio with Bonds

Bonds tend to have low correlation with stocks, so including both can significantly reduce overall portfolio volatility.

Especially during interest rate changes, combining bonds and stocks is an effective risk management strategy. For example, during rate hikes, reducing stock holdings and increasing bonds can limit losses.

Holding bonds with various maturities and credit ratings helps spread market risk and interest rate exposure.

Conclusion: Bonds as an Essential Component of Wise Investment

With expectations of interest rate cuts and rising bond prices, now may be the ideal time to consider bond investments seriously.

Bonds appeal to investors seeking higher returns than savings accounts while maintaining lower risk than stocks. If you’re new to bonds, start with safer options like government bonds or bond ETFs, then gradually expand to corporate and foreign bonds as your experience grows.

By 2025, bonds are no longer just an option—they are an indispensable asset for smart investors.