Bond Popularity... Financial Supervisory Service Provides Investment Precautions Guidance

The Financial Supervisory Service (FSS) has provided guidelines on important considerations for bond investments, including the need to account for exchange rate fluctuation risks when investing in overseas bonds.

According to the FSS on the 6th, when investing in overseas bonds, it is essential to consider the risk of exchange rate fluctuations. Even if the principal and interest paid by the overseas bond are the same, the amount of principal and interest received in Korean won by the investor may decrease due to changes in the exchange rate when investing in overseas bonds with Korean won.

Additionally, tax benefits are available when investing in bonds through Individual Savings Accounts (ISA) or Individual Retirement Pensions (IRP). Income generated from bond investments is generally subject to taxation, but currently, capital gains from bond trading are not taxed.

However, interest income from bonds is taxed at 15.4%. Some financial companies currently offer bond investment services through brokerage-type ISAs, which can help save on interest income tax from bond investments. Furthermore, some financial companies provide bond investment services through retirement pensions such as IRP or Defined Contribution (DC) plans, allowing investors to receive tax credits up to KRW 9 million annually while investing in bonds.

Derivative-linked bonds (ELB) require caution as the repayment of principal and interest depends on the issuer's ability to pay. ELBs, whose returns are linked to specific indices or stock prices, are principal and interest payment products but are not covered by deposit insurance, nor is there a legal obligation to separately deposit the investment funds. Therefore, if the issuer goes bankrupt, investors may not recover their principal and returns.

Although issuers often set the underlying assets of derivative-linked bonds as stocks of high-quality companies, the underlying assets only affect the level of returns and are unrelated to the possibility of principal and interest repayment. Whether principal and interest are repaid depends on the issuer securities company's ability to pay, so investors should fully understand these risks before investing.

When investing in ELBs, it is possible for the return to be 0% even if the underlying asset rises, so it is important to check the conditions for realizing returns in advance. Recently, ELBs that offer higher returns as the underlying asset rises significantly are commonly found. These products provide returns proportional to the stock price increase and guarantee principal at maturity even if the stock price falls, making them appear as high-return products without risk.

However, these products have an upper limit on stock price increases (knockout barrier), and if the stock price exceeds this limit even once causing a knockout, investors typically receive only the fixed return of 0%.

This is called an upward knockout product, but there are also downward and dual knockout structured products where returns are proportional to both stock price declines or rises and falls. Investors are advised not to invest solely based on the high maximum returns of knockout-type ELBs but to review the investment prospectus, simulated results, and the probability of knockout occurrence before investing.

Finally, when investing in bonds through maturity-matching funds, investors must check the redemption fees before investing.

When indirectly investing in bonds through bond funds, maturity-matching funds that manage by matching the fund's maturity with the maturity of the included bonds may charge early redemption fees of 3-5% of the redemption amount.

This is because if redemption is requested during management, the fund may not be able to hold the included bonds until maturity according to the management strategy and may have to sell some bonds quickly in small amounts, causing losses to the fund. Therefore, investors should select maturity-matching funds that align with their planned investment period and must check the level of redemption fees before investing.