Individual Investors Flocking to Bonds... Caution Advised Due to Possible Principal Loss

As individual investors' interest in bond investments increases, the Financial Supervisory Service (FSS) has provided guidance on precautions to take when investing in bonds.

On the 31st, the FSS explained that investors should be aware that bonds carry the risk of principal loss and are not protected by deposit insurance when making investments. According to the FSS, the net purchase volume of over-the-counter bonds by individual investors last year increased to 20.6 trillion KRW, 4.5 times that of the previous year.

Bond investment involves lending money to the issuing institution, and if the issuer goes bankrupt, it becomes difficult to recover the principal and interest. Subordinated bonds offer higher interest rates compared to general bonds, but since principal and interest are recovered only after senior bonds are repaid first, principal loss may occur if the issuer goes bankrupt.

Recently, the contingent convertible bonds sold by financial institutions are subordinated or deeply subordinated (hybrid capital securities) bonds, which have a lower repayment priority.

If the issuing institution is designated as a distressed financial institution, the obligations to repay debt and pay interest are eliminated, so investors should be cautious of the risk of principal loss. The FSS stated, "Unlike savings and time deposits, bonds are excluded from deposit insurance protection, so do not assume they are safer than stocks. Investors should examine the bankruptcy risk of the bond issuer before investing."

The FSS also explained that when investing in bonds, investors should not only check the credit rating evaluated by credit rating agencies but also verify the product risk rating separately assessed by the seller. Investors should carefully review information such as business risks of the issuer through the prospectus and credit rating reports, in addition to basic information like yield and maturity.

When purchasing over-the-counter bonds, it is advisable to compare bonds with the same credit rating and remaining maturity in terms of price (yield) before investing. Investors should also be aware that bond prices can fluctuate according to market interest rates and that it may be difficult to sell bonds before maturity after investment.