Bond Investment Basics: Assets to Watch in the Era of Interest Rate Changes

In today’s rapidly changing financial markets, many investors are seeking new opportunities. Are you feeling that stock volatility is high but savings yields are too low? If so, it’s time to revisit the Basics of Bond Investing.

Why Bonds Are Reassessed

As of 2025, bonds are gaining recognition not just as conservative assets but as strategic investment options. Considering the current annual yield of around 3.3% for 3-year Korean government bonds, they offer better returns than regular savings accounts while providing stability based on government creditworthiness.

The core appeal of bonds lies in predictable cash flow. Most bonds pay interest regularly every 3 to 6 months. As of 2025:

• 3-year government bonds: coupon rate around 2.3~2.4%
• Corporate bonds: expected 4~6% depending on credit rating
• Special bonds(public enterprises): mid-4% range

Bond Investing Basics: Five Key Characteristics

First, Layered Stability
The principal repayment likelihood depends on the issuer’s credit rating. AAA-rated corporate bonds or government bonds offer stability comparable to savings, but lower-rated bonds carry higher risk.

Second, Regular Interest Income
Unlike stock dividends, bond interest is paid at pre-set rates depending on credit rating and market conditions. This is a significant advantage for investors planning long-term finances.

Third, Liquidity Advantage
In Korea, the bond market’s average daily trading volume in Q1 2025 is about 25 trillion won, allowing bonds to be freely bought and sold before maturity. This contrasts with the penalties of early withdrawal from savings.

Fourth, Price Fluctuations with Interest Rate Changes
When market interest rates rise, existing bond prices fall; when rates decline, bond prices rise. Leveraging this, investors can aim for capital gains during falling rate periods.

Fifth, Tax Benefits
Interest income from direct bond investments is taxed, but capital gains from trading before maturity are tax-exempt. Certain products like ESG bonds may offer additional tax advantages.

Common Questions for Bond Beginners

Are bonds really safe in principal?

Bonds are not protected under the deposit insurance law. If the issuer’s credit deteriorates or they go bankrupt, principal loss can occur. However, government bonds or AAA-rated bonds are highly unlikely to do so.

How are bonds different from regular savings?

Regular savings are guaranteed by banks, while bond repayment depends on the issuer’s creditworthiness. Bonds offer the advantage of being tradable in the market before maturity and can appreciate in value if interest rates fall.

What happens if interest rates rise?

Interest rates and bond prices move inversely. When rates increase, existing bond prices decline. During expected rate hikes, short-term or floating-rate bonds are more advantageous.

Bond Investing Basics: Types and Yields

Government Bonds: Issued by the government, the safest bonds, but with lower yields.
Special Bonds: Issued by public enterprises like Korea Electric Power or Korea Road Corporation, offering higher yields than government bonds.
Local Bonds: Issued by local governments, with slightly higher risk and returns than government bonds.
Financial Bonds: Issued by banks and financial institutions, offering high liquidity.
Corporate Bonds: Issued by companies, with wide variation in credit ratings—requires careful review.
Foreign Bonds: Diversify assets with dollar-denominated bonds and benefit from currency hedging.

2025 Key Bond Yield Overview

Bond Investing Basics: Practical Investment Methods

Currently, there are three main ways to invest in bonds.

Direct Purchase of Individual Bonds
Buy desired bonds directly through securities firms’ HTS/MTS, banks, or financial platforms. Investors can choose specific bonds, but may need a minimum amount of capital.

Bond Funds
Invest in funds managed by asset managers that diversify across various bonds, allowing small investments with diversification benefits. Note that fund management fees apply.

Bond ETFs
Trade on stock exchanges like stocks, with low fees and high liquidity. This is the most accessible method for beginners.

Three Things Bond Beginners Should Avoid

Managing Rising Interest Rate Risks
If rates are expected to rise, opt for short-term or floating-rate bonds. Holding to maturity minimizes risk, but if considering early sale, monitor rate trends closely.

Issuer Credit Risk
When investing in corporate bonds, thoroughly check the issuer’s financial health and credit rating. Lower ratings offer higher yields but come with increased principal loss risk.

Exchange Rate Risk
For foreign bonds, currency fluctuations impact returns. A weak dollar can reduce won-denominated gains. Consider currency-hedged ETFs or small investments to diversify risk.

Bond Investing Basics: Role in a Portfolio

Bonds have low correlation with stocks, so including them in a portfolio can significantly reduce overall volatility. Especially during interest rate fluctuations, a balanced mix of bonds and stocks is highly effective for risk management.

If you seek stable income but are dissatisfied with the low yields of savings, build your portfolio gradually based on bond investing fundamentals. Starting with safe products like government bonds or bond ETFs, then expanding into corporate and foreign bonds over time, is a wise approach.