The meaning of bonds and practical management strategies that beginner investors must know in 2025

If you want to achieve stable asset growth but don’t know where to start, I recommend beginning with bonds. Bonds, which can pursue both the high safety of deposits and the profitability of stocks, are currently gaining renewed attention as expectations for interest rate cuts increase in 2025.

Understanding the Exact Meaning of Bonds

What exactly are bonds? In simple terms, bonds are a type of ‘financial contract’ where governments, corporations, and public institutions borrow money from investors when they need funds, agree to pay regular interest over a fixed period, and return the principal at maturity. From the investor’s perspective, purchasing bonds means providing funds to the issuer and gaining the right to receive fixed interest income and principal repayment.

Currently, in the financial market, bonds are evaluated as a core element of asset allocation beyond simple interest income products. For example, the annual yield of 3-year Korean government bonds is around 3.3%, making them more attractive compared to bank fixed deposits, while not exposing investors to the large volatility typical of stocks. Especially with the continuous emergence of innovative products like digital bonds and ESG(Environmental, Social, and Governance) bonds, the range of investment options is expanding.

Four Key Features of Bonds

1. Predictable Income Structure

The biggest appeal of bonds is the regular interest payments. Most bonds pay interest to investors every 3 to 6 months as scheduled. As of 2025, the coupon rate for 3-year government bonds is around 2.3-2.4%, and highly creditworthy corporate bonds can offer interest rates in the 4-6% range. This steady cash flow is especially useful for investors preparing for retirement or individuals needing regular income.

2. Stability Based on Issuer Credit

Government bonds or AAA-rated high-grade corporate bonds are perceived as having very low principal loss risk, similar to deposits. The higher the issuer’s credit rating, the lower the risk of principal and interest repayment failure. For investors prioritizing stability, checking credit ratings should be the first step in their investment process.

3. Liquidity for Trading Anytime Before Maturity

Bonds can be bought and sold on the secondary market at any time without waiting for maturity. Unlike deposits, early redemption does not incur penalties, and investors can immediately cash out when needed. In the first quarter of 2025, the average daily trading volume of Korean bonds reached about 25 trillion won, indicating active trading.

4. Price Fluctuation Opportunities Due to Interest Rate Changes

When market interest rates fall, the prices of existing bonds rise; when rates rise, prices fall. By leveraging this inverse relationship, investors can aim for capital gains, and individual investors trading directly are not taxed on these gains.

Bonds vs. Fixed Deposits: Which to Choose?

Although they may seem similar on the surface, bonds and fixed deposits are fundamentally different products.

Fixed deposits involve banks holding the investor’s funds for a set period and paying a contracted interest, with principal protected up to 50 million won under the Deposit Insurance Act. However, interest rates tend to be low, and early withdrawal may reduce interest earnings.

Bonds depend on the creditworthiness of various issuing institutions, with principal repayment prospects determined accordingly, and can be freely traded before maturity. While they can offer higher interest rates than fixed deposits, there is always a risk of loss if the issuer’s credit rating deteriorates.

Main Types of Bonds and Yield Comparisons

Government Bonds

Issued directly by the government, these have the highest creditworthiness. They are highly stable but tend to have lower interest rates.

Special Bonds

Issued by public enterprises like Korea Electric Power Corporation or Korea Expressway Corporation, offering slightly higher interest rates than government bonds.

Local Bonds

Issued by local governments, with the potential for higher yields than government bonds.

Financial Bonds

Issued by banks or financial institutions, offering good liquidity and suitable for short-term funds.

Corporate Bonds

Issued by companies, with interest rates varying significantly based on credit ratings. It is essential to thoroughly review the issuer’s financial health before investing.

U.S. Treasury Bonds

Recognized worldwide as a safe asset, offering diversification benefits in dollar assets and risk mitigation against exchange rate fluctuations.

Major Bond Yield Status in 2025

Since yields and risks vary greatly depending on the bond type, selecting products that align with your investment goals and financial plan is key.

Who Is Suitable for Bond Investment?

Investors Needing Regular Cash Flow

The regular interest payments of bonds are ideal for those seeking predictable income every month or semi-annually.

Retirees or Conservative Investors

If you want to avoid large price fluctuations but desire higher returns than deposits, bonds are an excellent choice.

Portfolio Risk Managers

If stock volatility is a concern, including bonds can significantly reduce overall portfolio volatility. Many investment professionals recommend bonds for stable income and risk diversification.

Investors Considering Tax Benefits and Global Diversification

Direct bond investments generate tax-exempt capital gains, and ESG bonds can offer additional tax benefits or government support. Overseas bonds like U.S. Treasuries provide dual benefits of dollar asset holdings and exchange rate risk diversification.

Risks to Avoid When Investing in Bonds

Price Drop Due to Rising Interest Rates

When the Bank of Korea raises the base rate, existing bond prices in the market decline. For example, if a bond pays 3% interest and market rates rise to 4%, the bond’s attractiveness decreases, causing its price to fall. If rate hikes are expected, consider short-term bonds with 1-3 year maturities or floating-rate bonds.

Credit Deterioration or Default Risk of Issuer

If a company issuing bonds faces management crises or bankruptcy, you may not recover the principal. This risk is especially high for lower-rated bonds. For safety, investing in bonds rated AAA or AA is advisable.

Exchange Rate Risk of Overseas Bonds

U.S. Treasury bonds or foreign bonds are affected by USD/KRW exchange rate fluctuations, which can significantly impact actual returns. During a weak dollar, returns in won may be negative. Consider hedged products or investing only part of your portfolio in dollar assets to diversify risk.

Practical Methods for Bond Investment

As of 2025, there are three main ways to invest in bonds in Korea.

1. Direct Purchase of Individual Bonds

You can buy government bonds, special bonds, or corporate bonds directly through securities firms’ HTS/MTS, bank branches, or financial platforms. In this case, only interest income tax applies, and capital gains from trading before maturity are tax-exempt, offering high tax efficiency.

2. Bond Funds

You can participate with small amounts in funds managed by asset managers that diversify investments across various bonds. Be aware that fund management fees apply.

3. Bond ETFs

Traded on stock exchanges like stocks, with real-time trading, low fees, and high liquidity. They also provide diversification benefits simultaneously.

Common Questions About Bond Investing for Beginners

Q: Are bonds also 100% principal protected like bank deposits?

A: No. Bonds are not covered by deposit insurance, so if the issuer goes bankrupt, you may lose your principal. Subordinated bonds are especially risky due to their lower repayment priority. Always check the issuer’s credit rating and product structure before investing.

Q: Besides credit ratings, what other factors should I consider?

A: You should review product risk grades, liquidity, maturity structure, prospectuses, and credit evaluations. The risk grade reflects how easily you can sell the bond and the complexity of its structure, making it an important consideration.

Q: How do interest rates relate to bond prices?

A: Interest rates and bond prices move inversely. When market rates rise → bond prices fall; when rates fall → bond prices rise. If you plan to sell before maturity, analyzing interest rate trends is essential.

Q: How should I match maturity and investment period?

A: For short-term funds, choose short-maturity bonds; for long-term funds, select long-maturity bonds. Bonds traded outside exchanges may be sold at unfavorable prices before maturity, so investing with funds that can hold until maturity is safer.

Q: Can bonds diversify my portfolio?

A: Yes. Bonds have low correlation with stocks, so including them can significantly reduce overall portfolio volatility and provide stable returns. During interest rate fluctuations, a proper mix of bonds and stocks is very effective for risk management.

Q: How do I find bonds with good yields?

A: Compare yields among bonds with similar credit ratings and maturities. You can find various bond information on the Korea Securities Depository Bond Information Center. Consider not only the interest rate but also actual investment conditions and tradability.

Q: What exactly are ESG bonds?

A: Bonds issued to promote environmental sustainability, social responsibility, and transparent management. Investors can realize social value while receiving additional tax benefits or government support. As a global trend, ESG bonds have high long-term growth potential.

Bond Strategies for Investors in 2025

Currently, with expectations for interest rate cuts rising, bond prices are expected to increase. Bonds are a must-have for wise investors who want higher returns than deposits while maintaining lower risk than stocks to protect their assets.

If you’re new to bond investing, start with relatively safe products like government bonds or bond ETFs. Once familiar, gradually expand your portfolio to include corporate bonds and foreign bonds. This step-by-step approach allows you to enjoy the benefits of bonds while minimizing unnecessary risks.