Understanding Bonds from Basics to Practice: An Essential Investment Guide for Beginners in Personal Finance

Are you thinking of starting financial planning but unsure where to begin? This is a great opportunity to properly understand the meaning of bonds and learn about investment methods that aim for balanced returns between savings and stocks.

Definition of Bonds and Their Role in Financial Planning

The meaning of bonds can be summarized as a ‘type of loan certificate’ issued by governments, public institutions, financial companies, and private enterprises to raise funds from investors. When investors purchase bonds, they lend money to the issuer and, in return, receive interest over a fixed period and get the principal back at maturity.

As of 2025, the reason bonds are gaining attention in the financial market is clear. They offer higher yields than regular bank deposits(expect around 3.3% annually for 3-year government bonds), while also protecting assets from stock market volatility. Especially with innovative products like blockchain-based digital bonds and ESG(Environmental, Social, and Governance) bonds being launched one after another, the range of choices has greatly expanded.

Five Key Elements of Bonds

To understand bonds properly, you need to grasp these five characteristics:

First, stability
The higher the credit rating of the issuer, the lower the risk of principal and interest repayment. For example, government bonds or AAA-rated corporate bonds have very low risk of principal loss, providing safety comparable to bank deposits.

Second, regular interest income
Most bonds pay interest periodically, typically every 3 to 6 months. As of 2025, the coupon rate for 3-year government bonds is around 2.3–2.4%, and corporate bonds can offer 4–6% interest depending on creditworthiness.

Third, liquidity
Bonds can be traded freely in the bond market both before and at maturity. The average daily trading volume in the Korean bond market is about 25 trillion won, making trading active and allowing cash conversion anytime, which is a significant difference from deposits.

Fourth, price volatility
Bond prices move inversely to market interest rates. When rates fall, existing bonds become more attractive, raising their prices; when rates rise, prices tend to fall. This can be exploited for capital gains through trading.

Fifth, tax benefits
When individual investors invest directly in bonds, only interest income is taxed, while capital gains from trading are tax-exempt. Certain products like ESG bonds also offer additional tax benefits.

Regular Deposit vs Bonds: Which is the Right Choice?

On the surface, both are interest-paying products, but fundamentally they differ.

Regular deposits are ‘principal guaranteed’ products where you deposit money in a bank and receive the agreed interest at maturity. Under the current deposit protection law, up to 50 million won is guaranteed, and this limit is expected to increase to 100 million won this year.

In contrast, bonds depend on the creditworthiness of the issuer for repayment ability, and they can be traded freely in the market before maturity. While early withdrawal from deposits results in penalties or reduced interest, bonds can potentially be sold at a profit if interest rates decline, which is a major advantage.

Types of Bonds and Yield Comparisons

The bond market offers various products based on issuer, credit rating, and maturity.

Government Bonds: Issued by the government, highest credit rating, very safe, but relatively lower yields.

Special Bonds: Issued by public enterprises like Korea Electric Power Corporation or Korea Expressway Corporation. Slightly riskier than government bonds but offer better yields while maintaining high stability.

Local Bonds: Issued by local governments, riskier than government bonds but still considered stable and investable.

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

Corporate Bonds: Issued by companies, with yields varying significantly based on credit rating. Thorough credit analysis of the issuer is essential before investing.

Foreign Bonds: U.S. Treasury bonds are globally recognized as safe assets, offering diversification in dollar assets and potential currency hedging benefits.

###2025 Bond Yield Comparison Table

Suitable Investors for Bond Investment

Investors needing regular cash flow: Bonds provide predictable income through regular interest payments, annually or semi-annually.

Retirement planners: A good alternative for those seeking higher returns than deposits without the volatility of stocks.

Diversification seekers: Bonds have lower price volatility than stocks and guarantee interest and principal if held to maturity, effectively reducing overall portfolio risk.

Tax-saving and global diversification enthusiasts: Capital gains are tax-exempt, and investing in foreign bonds can diversify exchange rate risks.

Three Risks to Watch Out for When Investing in Bonds

Bond prices fall when interest rates rise
If the Bank of Korea raises rates, existing bond prices may decline. For example, holding a bond with a 3% coupon when market rates rise to 4% makes the bond less attractive, causing its price to drop. If rate hikes are expected, short-term or floating-rate bonds are preferable.

Issuer credit deterioration risk
If the issuer’s credit worsens, they may be unable to repay principal, leading to potential losses. This risk is higher with lower-rated bonds. Risk-averse investors should prioritize AAA or AA rated bonds.

Foreign exchange risk in overseas bonds
Foreign bonds denominated in dollars are affected by exchange rate fluctuations. A decline in dollar value can lead to losses when converted back to won. Using currency-hedged ETFs or limiting investment size can help diversify this risk.

Three Ways to Start Bond Investing

Method 1: 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 from early sale are tax-exempt.

Method 2: Bond funds
Investing in funds managed by asset managers that diversify across multiple bonds allows for small-scale diversification. However, fund management fees apply.

Method 3: Bond ETFs
Traded on stock exchanges like stocks, with low fees and high liquidity, offering easy diversification.

Bond Investment Q&A for Beginners

Q: Are bonds principal guaranteed like deposits?
A: Bonds are not covered by deposit insurance. If the issuer goes bankrupt, principal loss can occur, especially with subordinated bonds which have lower repayment priority. Always check the issuer’s credit rating and product structure before investing.

Q: Besides credit ratings, what else should I check?
A: Review product risk grades, liquidity, maturity structure, prospectus, and credit evaluation reports. Risk grades reflect ease of redemption and complexity of the product.

Q: How does interest rate fluctuation affect bond prices?
A: Bond prices and interest rates move inversely. When rates rise, bond prices fall; when rates fall, prices rise. The actual return can vary significantly depending on the market rate at the time of sale before maturity.

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 reduce overall volatility and provide stable returns. Properly mixing these assets during interest rate changes is effective for risk management.

Q: How do I compare bond yields?
A: Compare yields among bonds with similar credit ratings and maturities. Don’t just look at interest rates; consider actual investment conditions and market liquidity.

Q: What are ESG bonds?
A: ESG bonds are issued to promote environmental sustainability, social responsibility, and transparent governance. Investors can realize social value and may receive additional tax benefits or government support. They are a growing trend with long-term growth potential.

Conclusion: Smart Bond Investment Strategies for Financial Planning

By accurately understanding the meaning of bonds and their characteristics, you can build a balanced investment portfolio that combines safety and profitability.

With recent expectations of interest rate cuts, bond prices are likely to rise. Now may be the perfect time to seriously consider bond investments. If you seek higher returns than deposits and more stability than stocks, bonds are a worthwhile option.

For beginners, starting with safer products like government bonds or bond ETFs is recommended. As you gain experience, gradually expanding into corporate and foreign bonds can diversify your portfolio. This step-by-step approach minimizes risks while maximizing returns, leading to a wise and effective financial planning path.