[Challenge Bond Ant]④ Bond Investment Guide for ‘Chaerini’ Beginners

Various Types Depending on Issuing Entity and Method
Check Credit Ratings, Fees, Taxes, etc.

[Asia Economy Reporter Minji Lee] Bonds are promissory notes issued to raise funds. They can be classified by the issuer, interest payment method, and guarantee status, such as government bonds, corporate bonds, financial bonds, guaranteed bonds, coupon bonds, and public bonds.

For example, "Construction company A issued 110 billion KRW in bonds with a 3-year maturity and a 4.7% coupon rate, guaranteed by company B." Here, the issuer is construction company A. Government bonds are issued by the state, local bonds by local governments, and corporate bonds by general companies like construction company A. A represents the credit rating. Corporate credit ratings range from AAA, AA+, AA, AA-, A+, A, A-, to BBB, with AAA being the highest creditworthiness. Since company B provided the payment guarantee, these are guaranteed bonds. The 4.7% coupon means the company pays 4.7% interest periodically at fixed intervals. Typically, 3-month coupon bonds are common, meaning interest is paid every three months. If the company issued the bonds via a public offering, they are public bonds; if issued in a private placement market, they are private bonds.

Bond prices move inversely to interest rates. As bond interest rates rise, bond prices tend to fall. During the Legoland incident, Korea Electric Power Corporation (KEPCO, AAA) issued 2-year coupon bonds with a 5.9% interest rate. From an investor’s perspective, it was an opportunity to invest in a virtually fail-proof company and earn high returns. Currently, interest rates have dropped significantly compared to then. KEPCO’s 2-year coupon bond is now issued at a 4% interest rate. Assuming interest rates fall further, bonds issued at 4% will become more valuable.

Bonds can be bought and sold like stocks. There are exchange-traded bonds listed on the Korea Exchange, traded in an order book similar to stocks, and over-the-counter (OTC) bonds traded directly between securities firms and clients at fixed interest rates without going through the Korea Exchange. OTC trading is more active than exchange trading. Bonds can be traded in units as small as 1,000 KRW via securities firms’ MTS (Mobile Trading System) or HTS (Home Trading Service). However, some securities firms only allow bond investments through HTS.

It is essential to check the fees charged by each securities firm. Fee rates vary by firm and by the remaining maturity of the bond. Generally, when purchasing bonds with maturities over two years, fees range from 0.15% to 0.3%.

While you can buy bonds directly, bond-type Exchange-Traded Funds (ETFs) are also popular. Like stock ETFs, they are easy to buy and sell, and since they invest in a basket of bonds with the same maturity by concept, they offer diversification benefits.

Tax considerations are also essential. For bond-type ETFs, like stock ETFs, a 15.4% dividend income tax is applied to capital gains. Individual bonds are different. For example, if you buy a bond with a 5% annual interest rate for 8,000 KRW and sell it at maturity for 10,000 KRW, you are not taxed on the 2,000 KRW capital gain. However, a 15.4% tax is imposed on the 5% interest income.