A Simple Explanation of Bonds - The Complete Guide for Beginner Investors

If you want to start investing but don’t know where to begin, I recommend starting with bonds. In this article, I’ll explain bonds very simply, focusing only on the key points every beginner investor should know.

What exactly are bonds?

Simply put, a bond is like a “contract to lend money to someone and receive interest.” When the government or a company needs funds, they borrow money from investors, promising to pay regular interest and return the principal at maturity.

For example, if you lend 1 million won to Korea Electric Power Corporation and receive annual interest, that’s a bond investment. It looks similar to a bank fixed deposit, but the structure is completely different.

As of 2026, bonds are gaining attention as an investment asset in the financial market. They offer higher returns than bank deposits and don’t fluctuate in price as sharply as stocks.

Five key features of bonds explained simply

I’ll explain five essential bond features that beginners must understand.

First, stability. The safety of bonds depends on the issuer’s credit rating. Government bonds or high-grade corporate bonds with AAA ratings are relatively safe, similar to bank deposits. Companies with lower credit ratings pose higher repayment risks.

Second, regular interest income. Most bonds pay interest every 3 or 6 months. For example, government bonds typically offer around 3% annual interest, while high-grade corporate bonds can yield 4-6%. The predictability and regularity of these payments are attractive.

Third, liquidity. Unlike fixed deposits, bonds can be bought and sold anytime in the bond market before maturity. If you need cash urgently, you can sell the bond immediately. The Korean bond market is very active and liquid.

Fourth, price volatility. Bond prices fluctuate with market interest rates. When rates fall, existing bonds’ prices go up; when rates rise, prices go down. This characteristic can be used to seek capital gains.

Fifth, tax benefits. For individual investors, interest income from bonds is taxed, but capital gains from trading bonds are tax-free. Investing in special bonds like ESG bonds can also provide additional tax advantages.

How do bonds differ from fixed deposits?

Understanding bonds is easier when compared to fixed deposits.

Fixed deposits involve depositing money in a bank and receiving the principal plus interest at maturity. The principal is fully protected, but the interest rate is usually low.

Bonds, however, depend on the issuer’s creditworthiness. They can be bought and sold freely before maturity, and if market rates fall, you can potentially profit from price increases. But if the issuer goes bankrupt, you may lose your principal.

Fixed deposits incur penalties if you withdraw early, whereas bonds’ prices depend on market conditions, which can lead to gains or losses when selling before maturity.

Bonds come in many types

Now that you understand what bonds are, let’s look at the different types.

Government bonds: Issued by the government. They have the highest credit rating and are very safe, but offer lower interest rates.

Special bonds: Issued by public enterprises (like Korea Electric Power, Road Corporation). Slightly riskier than government bonds but still reliable, with higher yields.

Local government bonds: Issued by local authorities. Slightly riskier than national bonds but still considered stable investments.

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

Corporate bonds: Issued by companies. Generally, lower credit ratings mean higher interest rates, but also higher risk. Choose carefully.

U.S. Treasury bonds: Issued by the U.S. government. Recognized worldwide as very safe assets, also offering diversification in dollar assets, popular among international investors.

As of 2026, yields vary significantly based on credit rating and maturity:

• 3-year government bonds: around 3% annually
• 3-year high-grade corporate bonds: about 4%
• 10-year special bonds: over 4%
• 10-year U.S. Treasury bonds: mid to high 4%

Who should invest in bonds?

Bonds are not suitable for all investors. They are especially good for those who:

Need steady cash flow: If you want additional income outside your salary, regular interest payments from bonds are attractive, providing predictable income every year or half-year.

Preparing for retirement: If you want higher returns than fixed deposits but less volatility than stocks, bonds are a good choice.

Want portfolio stability: A portfolio with only stocks is risky. Including bonds can significantly reduce overall risk because stocks and bonds tend to move inversely.

Interested in tax benefits and global diversification: No tax on capital gains, and investing in foreign bonds like U.S. Treasuries can hedge against exchange rate fluctuations.

Risks you must know when investing in bonds

While bonds have many advantages, they also carry risks. Here are three major risks that beginners should avoid:

First, interest rate risk: When rates rise, existing bond prices fall. For example, if you buy a bond with 3% interest and market rates increase to 4%, the bond’s value drops. If rates are expected to rise, consider short-term bonds or floating-rate bonds that adjust with market rates.

Second, credit risk: If the issuer faces financial trouble or bankruptcy, you may not get your principal back. Lower credit ratings mean higher risk. To avoid this, start with high-grade bonds like AAA or AA.

Third, exchange rate risk: For foreign bonds, currency fluctuations matter. If the dollar appreciates against your local currency, your returns may decrease. To hedge this risk, consider currency-hedged ETFs or limit foreign bond exposure.

How to invest in bonds today?

In Korea, as of 2026, there are mainly three ways to invest in bonds:

First, direct purchase of individual bonds: Through securities firms’ trading platforms, banks, or online financial platforms, you can buy government, special, or corporate bonds. Interest income is taxed, but capital gains from selling before maturity are tax-free.

Second, bond funds: Managed funds that invest in a diversified portfolio of bonds. They offer diversification with smaller amounts but charge management fees.

Third, bond ETFs: Traded on stock exchanges like stocks, offering real-time trading, low fees, high liquidity, and good diversification.

For beginners, starting with bond ETFs or funds is recommended over direct purchase, as they are simpler and less risky.

Is it okay to start investing in bonds now?

I’ve tried to explain bonds simply, but the core message is this: bonds are the best choice for investors seeking a balance of stability and returns.

If bank deposits alone are not enough and stock market volatility is too high, bonds are a perfect fit. With recent expectations of interest rate cuts, now may be a good time to start bond investing.

If you’re new to investing, begin with safe products like government bonds or bond ETFs. As you gain experience, gradually explore special bonds, corporate bonds, and foreign bonds.

Frequently Asked Questions about bond investing

Q1: Are bonds fully guaranteed like deposits?
No. Bonds are not protected by deposit insurance. If the issuer goes bankrupt, you may lose your principal. This risk is higher with lower-rated or subordinate bonds. Always check the issuer’s credit rating before investing.

Q2: Besides credit rating, what else should I consider?
Check the product’s risk grade, liquidity, maturity structure, and read the prospectus. The risk grade reflects how easily you can sell the bond and the complexity of the product.

Q3: Do bond prices really move inversely to interest rates?
Yes. When market rates rise, bond prices fall; when rates fall, prices rise. If you sell before maturity, market rate trends greatly influence your actual returns.

Q4: How should I match bonds’ maturity with my investment period?
Choose bonds with maturities aligned with your goals. Short-term bonds for short-term needs, long-term bonds for long-term goals. Be cautious with over-the-counter bonds, as early sale may be difficult or at unfavorable prices. Only invest funds you can hold until maturity.

Q5: Can bonds diversify my portfolio?
Absolutely. Bonds tend to move inversely to stocks, helping reduce overall volatility. Combining stocks and bonds is especially effective during interest rate changes.

Q6: How do I compare yields among bonds?
Compare bonds with similar credit ratings and maturities. Use official sources like the Korea Financial Investment Association’s bond info center for accurate yield data. Don’t just look at interest rates; consider actual investment conditions and liquidity.

Q7: What are ESG bonds?
ESG bonds are issued to promote environmental, social, and governance goals. They offer similar yields to regular bonds but may include additional tax benefits or government support. If you want to invest with social responsibility, they are a good option.