2025 Bond Investment Guide: Essential Things Beginners Must Know

What is the first thing that comes to mind when starting to invest? Stocks can be highly volatile, and savings accounts may offer very low returns. However, there is an asset class that sits between savings and stocks. That is bonds. As of 2025, bonds are gaining significant popularity in the Korean investment market due to their higher yields compared to savings and greater stability than stocks.

What exactly are bonds

Bonds are IOUs issued by governments, public enterprises, financial institutions, and corporations to raise funds from investors. Buying a bond means lending money to the issuer, receiving regular interest payments over a set period, and getting the principal back at maturity. It’s a contractual agreement.

As of 2025, the annual yield of 3-year Korean government bonds is around 3.3%, which is higher than bank savings accounts. At the same time, the government guarantees principal and interest payments, making bonds a relatively safe investment. Recently, innovative products like digital bonds utilizing blockchain technology and ESG bonds focusing on environmental and social responsibility are being launched, greatly expanding investor options.

Five key features of bonds

1. Predictable stability

The biggest appeal of bonds is their stability. Especially, higher credit ratings increase the likelihood of receiving principal and interest. AAA-rated corporate bonds and government bonds carry very low risk of principal loss, offering security close to that of savings accounts.

2. Regular cash income

Most bonds pay interest periodically, every 3 to 6 months. As of 2025, the coupon rate for 3-year treasury bonds is around 2.3–2.4%, and corporate bonds can offer 4–6% depending on credit rating. This makes bonds attractive for retirees or investors needing steady income.

3. Excellent liquidity

Bonds can be bought and sold freely in the bond market even before maturity. Unlike savings accounts, they can be liquidated anytime without early withdrawal penalties. In fact, the average daily trading volume in the Korean bond market in Q1 2025 is about 25 trillion won, indicating very active trading.

4. Profit opportunities from interest rate changes

When market interest rates fluctuate, bond prices move inversely. Falling rates cause bond prices to rise, and rising rates cause prices to fall. Investors can potentially profit from these price movements through trading.

5. Tax advantages

Individual investors investing directly in bonds are taxed only on interest income, while capital gains from selling before maturity are tax-exempt. ESG bonds may also offer additional tax benefits.

Bonds vs. fixed deposits: which suits me better

At first glance, they seem similar, but bonds and fixed deposits are entirely different products.

Fixed deposits are principal-guaranteed products issued by banks. Under current deposit protection laws, up to 50 million won of principal is protected. However, early withdrawal reduces interest, and they cannot be traded freely before maturity.

In contrast, the safety of bonds depends on the credit rating of the issuer. They can be traded freely in the market before maturity, and when interest rates fall, they can even generate capital gains. However, if the issuer’s credit deteriorates, there is a risk of principal loss.

Main differences:

• Issuer: bonds(government, corporations, public institutions) vs fixed deposits(bank)
• Maturity period: bonds(from a few months to several decades) vs fixed deposits(1 month to 3 years)
• Interest payment: bonds(periodic or lump sum at maturity) vs fixed deposits(lump sum at maturity)
• Liquidity before maturity: bonds(freely tradable) vs fixed deposits(penalties for early withdrawal)
• Risk level: bonds(varies with credit rating) vs fixed deposits(insured and protected)

Types and characteristics of bonds

Bonds are classified by issuer type.

Government bonds: Issued directly by the government, highest credit rating. Very safe but generally lower yields.

Special bonds: Issued by public enterprises like Korea Electric Power or Korea Road Corporation. Slightly riskier than government bonds but still offering high stability and reasonable returns.

Local bonds: Issued by local governments, slightly riskier than national bonds but still relatively stable.

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

Corporate bonds: Issued by companies. Yields vary greatly depending on credit rating; thorough due diligence on the issuer is essential.

U.S. Treasury bonds: Globally recognized safe assets. Offer diversification in dollars and currency hedging benefits, popular among investors building global portfolios.

2025 Key bond yield overview:

• 3-year government bonds(AA): 3.32%
• Seoul municipal bonds 5-year(AA-): 3.65%
• Korea Electric Power special bonds 10-year(A+): 4.10%
• Samsung Electronics corporate bonds 3-year(AAA): 3.95%
• U.S. 10-year Treasury(AAA): 4.25%

Three risks to avoid when investing in bonds

Rising interest rates leading to falling bond prices

The most important point is that bond prices and market interest rates move inversely. When rates rise, existing bonds with lower coupons decrease in value. If you need to sell before maturity, you could incur losses.

To mitigate this, if rate hikes are likely, consider short-term bonds (1–3 years) or floating-rate bonds.

Deterioration of issuer’s creditworthiness

If you buy a corporate bond and the issuer’s credit rating drops or its financial health worsens, you could lose your principal. This risk is higher with lower-rated bonds.

For conservative investors, focusing on bonds rated AAA or AA+ is safer.

Currency fluctuations affecting foreign bond returns

Foreign bonds like U.S. Treasuries are traded mainly in dollars. Exchange rate movements can affect returns in won terms, even if interest payments are the same. A weakening dollar can reduce profitability.

If currency risk concerns you, consider using currency hedging products or limit foreign bond investments to a portion of your total assets to diversify risk.

Three ways to start investing in bonds

Direct purchase of individual bonds

You can buy government bonds, special bonds, or corporate bonds directly through securities firms’ HTS/MTS, bank branches, or digital platforms. Direct investment means only interest income is taxed; capital gains from trading before maturity are tax-free.

Bond funds

Invest in funds managed by asset managers that diversify across multiple bonds. Even small investments can achieve diversification, but fund management fees apply.

Bond ETFs(Exchange-Traded Funds)

Trade on stock exchanges in real-time like stocks. They offer low fees, high liquidity, and diversification benefits. The easiest way for beginners to access bond investing.

Characteristics of investors suitable for bond investing

Those needing regular cash flow: Periodic interest payments provide predictable income.

Retirees or near-retirement individuals: Ideal for those seeking higher returns than savings without large price volatility.

Investors uncomfortable with stock market volatility: Bonds have low correlation with stocks, significantly reducing portfolio volatility.

Those seeking tax benefits and global diversification: No tax on capital gains and the ability to diversify into dollar assets via foreign bonds like U.S. Treasuries.

Important considerations before investing in bonds

Before investing, check the following:

Credit rating: The primary criterion for assessing issuer’s creditworthiness. Higher ratings mean safer investments.

Product risk grade: An overall indicator considering liquidity, complexity, and other risks.

Liquidity level: Confirm how easily the bond can be bought or sold in the market.

Maturity structure: Choose maturities aligned with your investment horizon and cash needs.

Prospectus and credit evaluation: Understand detailed product features and risks thoroughly.

Proper allocation strategy: bonds and stocks

Since bonds have low correlation with stocks, holding both can reduce overall portfolio volatility. For example, a portfolio with 100% stocks is highly volatile, but a mix of 70% stocks and 30% bonds can significantly smooth out price swings.

Especially during periods of high interest rate fluctuations, a balanced combination of bonds and stocks is very effective for risk management.

Q&A for beginner bond investors

Q: Are bonds guaranteed to return 100% of principal like deposits?
A: No. Bonds are not insured deposits, and principal can be lost depending on the issuer’s creditworthiness and circumstances. Always check the issuer’s credit rating and product structure carefully before investing.

Q: What should I pay attention to when comparing bond yields?
A: Compare bonds with similar credit ratings and maturities for meaningful comparisons. You can find yield information on sites like the Korea Financial Investment Association Bond Information Center.

Q: How are interest rate changes related to bond prices?
A: Bond prices and market interest rates move inversely. When rates rise, bond prices fall; when rates fall, bond prices rise. This relationship is crucial if you plan to sell before maturity.

Q: How should I match bond maturities with my investment period?
A: Choose maturities that align with your cash flow needs. Short-term bonds for short-term funds, long-term bonds for long-term goals. Be cautious with over-the-counter bonds, as early sale can be difficult or disadvantageous; invest with funds you can hold to maturity.

Q: What are ESG bonds?
A: ESG bonds are issued to promote environmental protection, social responsibility, and transparent governance. They allow investors to achieve social impact and may offer additional tax benefits or government support. They are a growing trend with high long-term growth potential.

Conclusion: Bonds are a wise choice in 2025

With expectations of interest rate cuts and rising bond prices, now may be an ideal time to consider bond investments.

Bonds are attractive for investors seeking higher returns than savings while wanting to protect assets with lower risk than stocks. Beginners should start with safer products like government bonds or bond ETFs, then gradually expand into corporate and foreign bonds to diversify and balance risk and return.