Bonds explained simply: The secret to stable returns that even beginner investors can understand

What Are Bonds and Why Are They Trending These Days?

If you’re a beginner investor, you might have thought, “Stocks are risky, and savings accounts offer too little interest.” The middle ground for this dilemma is bonds.

Bonds are essentially a structure where you lend money to an institution—(government, company, public institution, etc.)—and receive interest in return. Unlike depositing money in a bank, bonds are like a ‘promissory note’ where the issuer promises to repay the principal and interest on a set date.

As of 2025, the annual yield on 3-year Korean government bonds is about 3.3%, which is higher than the typical 2% on bank fixed deposits(, and much safer than the high volatility of stocks). Plus, the trust that the government guarantees adds to the confidence.

Is It Really Safe to Say Bonds Are Safe?

Not all bonds have the same level of safety. The key factor is credit rating.

Government bonds( issued by the government are almost risk-free, and special bonds) like Korea Electric Power Corporation, Korea Road Corporation, etc.( are next in safety. Regular corporate bonds vary greatly depending on the company’s creditworthiness. If a company has an AAA rating, it’s almost safe, but if the credit rating is low, there’s a risk of not getting back the principal if the company goes bankrupt.

Therefore, checking the credit rating is not optional but essential when investing.

5 Key Features of Bonds

1) Regular Cash Flow
Most bonds pay interest every 3 to 6 months. You can wait until maturity like a deposit or reinvest the received interest.

2( Moves Opposite to Interest Rates
When market interest rates rise, the price of existing bonds falls. Conversely, when rates fall, bond prices rise. Understanding and leveraging this characteristic can also generate trading profits.

3) Can Be Sold Before Maturity
You don’t have to hold bonds until maturity. The Korean bond market’s average daily trading volume in Q1 2025 was about 25 trillion won, indicating active trading. You can buy and sell bonds in real-time on the bond market.

4) Tax Benefits
Interest received from directly purchased bonds is taxed, but gains from trading bonds are tax-free. This is a significant difference from deposits.

5) Various Types Available
Options include government bonds, public enterprise bonds, corporate bonds, US Treasury bonds, ESG bonds, etc. Each has different yields and risks, so choose according to your investment profile.

Which Is Better: Savings or Bonds?

Both are products that pay interest, but their structures are completely different.

Savings involve depositing money in a bank and receiving a fixed interest at maturity. The principal is guaranteed) up to 50 million won), and even if broken midway, the interest is small but the principal remains safe.

Bonds’ risk depends on the issuer’s creditworthiness. You can trade them freely in the market before maturity, and you can also profit from price increases when interest rates fall. There are no early termination penalties like deposits. However, if the issuer goes bankrupt, you may not recover the principal.

Decision criteria: If stability is the top priority, go for savings; if you want slightly higher returns and can monitor the bond market, bonds are recommended.

Types of Bonds and Yield Comparisons

There are many options like government bonds, special bonds, corporate bonds, foreign bonds, so familiarize yourself with their characteristics.

Government Bonds: Issued by the government, the safest, but with lower interest rates—around 3.3%.

Special Bonds: Slightly riskier than government bonds but offer higher yields—around 4%. Issued by public enterprises like Korea Electric Power and Korea Road.

Local Bonds: Issued by local governments, riskier than government bonds but still stable—around 3.6%.

Corporate Bonds: Issued by companies, with expected yields of 4-6% depending on credit rating. Credit check is essential.

US Treasury Bonds: Recognized as a global safe asset. Popular among investors interested in diversification with dollar assets and currency hedging—around 4.25%.

Who Should Invest in Bonds?

People needing regular cash flow
The interest from bonds can serve as a steady side income, like part-time work. You can get predictable income annually or semi-annually.

People preparing for retirement
If you want higher returns than deposits without large price fluctuations, bonds are the best choice.

People uncomfortable with stock volatility
Bonds have low correlation with stocks, so allocating some to bonds can significantly reduce overall portfolio volatility and provide stability.

People wanting to reduce taxes
Gains from trading bonds you directly invest in are tax-free, and products like ESG bonds can offer additional tax benefits.

People considering dollar asset diversification
Investing in US Treasury or foreign bonds can lead to returns affected by USD exchange rates, which can be used as a risk diversification strategy.

Common Pitfalls to Avoid in Bond Investing

1) Losses When Interest Rates Rise
When the Bank of Korea raises the base rate, existing bond prices fall. For example, if you buy a bond with a 3% interest rate and market rates rise to 4%, the bond becomes less attractive and its price drops. If rates are expected to rise, it’s better to choose short-term bonds or floating-rate bonds.

2( Risk of Issuer Default
If you buy a corporate bond and the company goes bankrupt, you may not get back the principal. The risk is higher with lower credit ratings. Start with AAA or AA rated bonds.

3) Currency Fluctuations in Foreign Bonds
Investing in US bonds when the dollar weakens can reduce returns when converted back to won, even if interest is earned. If currency risk worries you, consider hedged ETFs or invest only part of your portfolio to diversify risk.

How to Start Investing in Bonds

Direct Purchase
You can buy individual bonds through securities firms’ HTS, bank branches, or financial platforms. Only interest income tax applies, and trading gains are tax-free.

Bond Funds
Managed by asset managers, these funds diversify investments across multiple bonds. They offer diversification even with small amounts but charge management fees.

Bond ETFs
Trade on stock exchanges like stocks, with real-time trading, low fees, high liquidity, and excellent diversification, making them suitable for beginners.

Is Now the Time to Invest in Bonds?

Recently, expectations of interest rate cuts have increased, making bond prices potentially rise. This could be a good time to start investing in bonds.

Bonds are an attractive option for investors who want higher returns than deposits but lower risk than stocks to protect their assets.

Start with relatively safe products like government bonds or bond ETFs, and as you gain experience, expand your portfolio to include corporate bonds, foreign bonds, etc.

Frequently Asked Questions by Bond Beginners

Can bonds also result in principal loss?
Yes. Bonds are not protected by deposit insurance, and if the issuer goes bankrupt, you may not recover the principal. Subordinated bonds carry even higher risk due to lower repayment priority.

What happens to bonds when interest rates rise?
Bond prices move inversely to interest rates. When rates go up, bond prices fall; when rates go down, bond prices rise.

Which type of bond should I start with?
If you want safety, start with government bonds. If you want higher returns with minimal risk, consider AAA-rated corporate bonds or bond ETFs of large, stable companies.

How should I match investment duration with bond maturity?
Choose maturities that match your cash needs. Short-term bonds are suitable for short-term funds, and long-term bonds for long-term funds.

Is it effective to hold both bonds and stocks?
Yes. Since bonds and stocks have low correlation, combining them in a portfolio can significantly reduce overall volatility and provide more stable returns.

What are ESG bonds?
Bonds issued with environmental, social responsibility, and transparent governance goals. They often offer additional tax benefits or government support and are a growing trend with long-term growth potential.