Bonds, the balance between profitability and stability that beginners should know

Many people struggle to decide between savings accounts and stocks when starting their investment journey. Is there a missed option in between? The answer is bonds. Bonds are gradually gaining attention as an asset class that offers higher returns than savings accounts while not being as risky as stocks.

What exactly are bonds?

Bonds are agreements where issuers such as governments, corporations, or public institutions borrow money from investors when they need funds. By purchasing bonds, investors provide capital to the issuer and, in return, receive regular interest payments and the principal amount at maturity.

As of 2025, the annual yield on 3-year Korean government bonds is approximately 3.3%, which is higher than the typical 2.5~3% of bank savings(, while exhibiting much lower volatility. Recently, innovative products like digital bonds utilizing blockchain technology and ESG bonds have emerged, rapidly expanding investors’ options.

Five key features of bonds

1. Stability
Bonds issued by entities with high credit ratings carry lower principal and interest repayment risks. Especially, government bonds or AAA-rated corporate bonds are considered safe assets with minimal risk of principal loss.

2. Regular interest income
Most bonds pay interest periodically, such as quarterly or semi-annually. Korean treasury bonds offer around 2.3~2.4%, while high-credit corporate bonds can yield 4~6%.

3. Sufficient liquidity
Bonds can be freely bought and sold in the market even before maturity. The average daily trading volume in the Korean bond market in Q1 2025 is about 25 trillion won, indicating a vibrant market.

4. Price fluctuation risk
When interest rates fall, existing bond prices rise; when rates rise, prices fall. This means investors can also aim for capital gains based on interest rate outlooks.

5. Tax benefits
For individual investors holding bonds directly, only interest income is taxed, while capital gains are tax-exempt. ESG bonds may offer additional tax advantages.

Savings account vs bonds: what are the differences?

Both products pay interest, but their structures are entirely different.

Savings accounts guarantee the principal, with fixed returns. Under the current deposit protection law, up to 50 million won is protected, and this limit is expected to increase to 100 million won this year. However, early withdrawal incurs interest penalties.

Bonds depend on the issuer’s creditworthiness for principal repayment. They also offer the potential for capital gains from price changes before maturity and have much higher liquidity. Unlike savings accounts, there are no early withdrawal penalties.

Characteristics and yields by bond type

Bonds are classified based on the issuer and their features.

Government bonds: Issued by the government, with the highest credit rating but relatively lower yields. Suitable for conservative investors seeking absolute safety.

Special bonds: Issued by public enterprises like Korea Electric Power Corporation or Korea Road Corporation. Slightly higher risk than government bonds but offering better yields.

Local government bonds: Issued by local authorities, with higher risk than government bonds but still considered stable investments.

Financial bonds: Issued by banks or financial institutions, offering high liquidity and suitable for short-term funds.

Corporate bonds: Issued by companies, with yields varying significantly depending on credit ratings. Investors should review the issuer’s financial health before investing.

U.S. Treasury bonds: Recognized worldwide as a safe asset. Popular among global investors for diversification and currency hedging benefits.

Major bond yield outlooks for 2025

Suitable investor profiles for bond investment

Those needing steady cash flow: Regular interest payments provide predictable income, ideal for retirees or investors needing monthly income.

Those sensitive to stock volatility: Bonds have much lower price volatility compared to stocks. Including bonds in a portfolio can effectively reduce overall risk.

Those seeking tax minimization: Capital gains from bond trading are tax-exempt, and ESG bonds may offer additional tax benefits.

Global diversification seekers: Overseas bonds, especially U.S. Treasuries, help diversify currency risk and provide dollar asset exposure.

Three essential risks in bond investing

Rising interest rates cause bond prices to fall
When the Bank of Korea raises the base rate, existing bonds decrease in value. For example, a bond with a 3% coupon may become less attractive if market rates rise to 4%, potentially leading to losses if sold early. If rate hikes are expected, consider short-term or floating-rate bonds.

Issuer credit deterioration risk
Corporate bonds’ risk depends on the issuer’s financial health. In extreme cases, bankruptcy can lead to principal loss. Prioritize bonds with verified credit ratings like AAA or AA for safety.

Foreign bond currency risk
Overseas bonds like U.S. Treasuries are dollar-denominated. Fluctuations in the USD/KRW exchange rate can affect returns in won. Using currency-hedged ETFs or diversifying investments can mitigate this risk.

How to start investing in bonds?

Direct purchase of individual bonds
You can buy government, special, or corporate bonds directly through securities firms’ HTS/MTS, banks, or financial platforms. Only interest income is taxed; capital gains are tax-free.

Bond funds
Managed by asset managers, these funds invest in diversified bonds. They offer diversification with small investments but involve management fees.

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

Common questions about bond investing

Q: Are bonds guaranteed like savings deposits?
A: Bonds are not covered by deposit insurance. Principal risk depends on the issuer’s creditworthiness. Subordinated bonds have lower repayment priority and higher risk, so always check credit ratings and product structure before investing.

Q: What happens to bond prices when interest rates rise?
A: They move inversely. When rates go up, bond prices fall; when rates go down, bond prices rise. Consider the interest rate outlook before selling before maturity.

Q: How are ESG bonds different from regular bonds?
A: ESG bonds are issued with sustainability goals like environmental protection, social responsibility, and transparent governance. Investors can realize social value and may receive additional tax benefits, with high long-term growth potential.

Q: What is the effect of holding both bonds and stocks?
A: Bonds have low correlation with stocks, so including them in a portfolio can significantly reduce overall volatility. Combining bonds and stocks appropriately during interest rate changes is an effective risk management strategy.

In conclusion: now is the time to seriously consider bonds

Recent expectations of interest rate cuts have drawn attention to the potential rise in bond prices. This could be an ideal time to start investing in bonds.

Bonds are not just low-yield assets. When used properly, they can pursue higher returns than savings while avoiding the risks associated with stocks.

If you’re just beginning, start with safe products like government bonds or bond ETFs, then gradually expand your portfolio to include special bonds, corporate bonds, and overseas bonds. Remember, the true value of bond investing lies in continuous learning and market experience.