Bonds Explained Simply: Essential Income Strategies Every Beginner Investor Must Know

Have you set financial goals but are unsure where to start with specific products? Recently, bonds are gaining renewed attention in the investment market. Investors seeking safety comparable to fixed deposits while aiming for better returns than stocks are increasingly interested. This article summarizes everything beginners must know, from the definition of bonds to practical usage.

Is now the right time for bond investment?

A bond is a financial contract issued by governments, corporations, or public institutions that borrows money from investors when funds are needed, promises to pay interest over a certain period, and returns the principal at maturity.

From an investor’s perspective, buying a bond means lending money to the issuer and gaining the right to interest payments and principal repayment.

As of 2025, the bond market remains attractive. The annual yield on 3-year Korean government bonds exceeds 3.3%, surpassing bank fixed deposits(2.5~2.8%), and since the government guarantees principal and interest, safety is excellent. The average daily trading volume in the Korean bond market in the first quarter is about 25 trillion won, indicating ample liquidity for quick cash conversion.

Understand the five key features of bonds

First, relatively low risk
Bonds issued by high credit-rated entities have minimal principal and interest repayment risk. Treasury bonds and AAA-rated corporate bonds offer safety levels close to deposits.

Second, fixed interest payments
Most bonds pay regular interest quarterly or semi-annually. As of 2025, 3-year government bonds offer yields around 2.3~2.4%, with lower-rated bonds offering higher yields(corporate bonds 4~6%) as compensation.

Third, can be sold anytime when needed
No need to wait until maturity. Bonds can be freely traded in on- and off-market, and during falling interest rate periods, capital gains are also possible.

Fourth, price fluctuation with interest rate changes
When market interest rates rise, existing bond prices fall; when rates fall, prices rise. Properly leveraging this can realize trading profits.

Fifth, tax benefits
Interest income is taxed when directly invested, but capital gains are tax-exempt. Special products like ESG bonds may offer additional tax advantages.

Fixed deposits vs bonds: which is better?

At first glance, both are interest-earning products, but there are significant differences.

Fixed deposits involve depositing assets with a bank and receiving interest at the agreed rate upon maturity. The principal is protected up to 50 million won under the current deposit protection law, which will be expanded to 100 million won this year. However, early withdrawal results in reduced interest.

In contrast, bond repayment likelihood depends on the issuer’s creditworthiness, and they can be bought or sold freely in the market before maturity. When interest rates decline, selling bonds can generate gains. However, bonds are not protected by deposit insurance.

Types of bonds and their yield comparisons

Government bonds: Issued by the government, highest credit rating. Safety is top, but yields are the lowest(around 3.3%).

Special bonds: Issued by public enterprises like Korea Electric Power Corporation, Korea Road Corporation. Slightly higher risk and yields(around 4.1%).

Municipal bonds: Issued by local governments. Risk is higher than government bonds but still considered stable investments.

Financial bonds: Issued by banks and financial institutions. Highly liquid, suitable for short-term funds.

Corporate bonds: Issued by companies. Yield varies significantly depending on credit rating; checking issuer creditworthiness before investing is essential(range 3~6%).

Overseas bonds: Global safe assets like US Treasury bonds. Popular among international investors for dollar diversification and currency hedging benefits(around 4.25%).

Who is bond investment suitable for?

Investors needing regular cash flow: Bonds provide predictable income through periodic interest payments.

Retirees: A good means to pursue better returns than deposits without the high volatility of stocks.

Investors sensitive to volatility: Incorporating bonds into the portfolio can effectively reduce overall risk if stock market fluctuations are uncomfortable.

Investors seeking tax benefits and global diversification: Capital gains are tax-exempt, and holding foreign bonds offers dollar asset diversification.

Three risks to check before investing in bonds

First, bond prices fall when interest rates rise
When central banks raise benchmark rates, newly issued bonds offer higher yields, causing existing bonds with lower rates to decrease in value. If interest rate hikes are expected, short-term or floating-rate bonds are safer.

Second, principal loss due to issuer’s credit deterioration
If a company issuing bonds defaults, principal may not be recovered. The lower the credit rating, the higher the risk. For conservative investors, starting with AAA or AA-rated bonds is wise.

Third, currency risk with overseas bonds
For dollar bonds like US Treasuries, exchange rate fluctuations affect returns. A weakening dollar can reduce returns in won terms. If currency risk is a concern, consider currency-hedged ETFs or allocate only part of the investment to foreign bonds.

Three ways to start bond investing

First, direct bond purchase
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-exempt.

Second, bond funds
Invest in funds managed by asset managers that diversify across multiple bonds. Offers diversification with small investments but incurs fund management fees.

Third, bond ETFs
Trade on stock exchanges like stocks. Low fees, high liquidity, and diversification benefits are key advantages.

Bond investment checklist for beginners

Pre-investment essentials

• Have you checked the issuer’s credit rating?
• Read the product risk grade and prospectus?
• Does the maturity align with your financial plan?
• When are the regular interest payment dates?
• If planning to sell before maturity, is liquidity sufficient?
• For foreign bonds, do you have a plan for exchange rate fluctuations?

Portfolio tips

Bonds and stocks have low correlation, so holding both can reduce overall risk and provide stable returns. During interest rate changes, a balanced mix is especially effective.

If you’re a beginner, start with safe products like government bonds or bond ETFs, then gradually diversify into corporate and foreign bonds.

Frequently Asked Questions

Q: Are bonds also 100% principal protected like deposits?
A: No. Bonds are not covered by deposit insurance, so if the issuer goes bankrupt, principal loss can occur. Subordinated bonds are even riskier due to lower repayment priority. Always check credit ratings and product structure carefully.

Q: What should I look at when comparing bond yields?
A: Compare bonds with similar credit ratings and maturities. Use sources like the Korea Financial Investment Association Bond Information Center to check yields. Don’t just look at interest rates; consider actual trading conditions and market liquidity.

Q: Will my bonds really lose value if interest rates go up?
A: When market rates rise, existing bonds’ prices fall if sold before maturity. However, if held to maturity, you receive the promised interest and principal, so there’s no real loss. If planning to sell early, monitor interest rate trends.

Q: What makes ESG bonds special?
A: Issued to promote sustainability goals like environmental protection, social responsibility, and transparent management. They can offer additional tax benefits or government support. Growing globally, they are viewed as having high long-term growth potential.

Q: Should I choose bond funds or bond ETFs?
A: Funds are managed by professionals, reducing decision-making effort but involve management fees. ETFs have lower fees, higher liquidity, and you control trading timing. Choose based on your investment style and interest.