FSS: "Bonds Also Risk Principal Loss... Long-Term Bonds Have High Price Volatility"

The Financial Supervisory Service (FSS) announced 'Precautions for Bond Investment During Interest Rate Fluctuations' as bond investment volumes increased due to expectations of a U.S. interest rate cut.

According to the FSS on the 19th, the net purchase volume of over-the-counter bonds by individual investors rose from 3 trillion won at the end of last year to 3.4 trillion won last month. First, the FSS cautioned that bonds are financial products where principal loss is possible.

Bonds are securities received when investors lend funds to issuers such as the government or financial institutions, and principal loss can occur if the issuer defaults or goes bankrupt. Additionally, if bonds are traded before maturity, their prices can vary depending on the market interest rate at the time of sale. When market interest rates rise, bond prices fall, potentially causing investment losses if sold prematurely.

The FSS also noted that even if market interest rates decline, if the interest rate changes occur more slowly than expected, invested funds may be tied up longer than planned. The FSS emphasized that long-term bonds carry greater price fluctuation risks. This is because long-term bonds highlight the advantage of receiving the current higher interest rates compared to short-term bonds during periods of declining market interest rates.

Regarding trading gains, the extent of bond price changes due to interest rate fluctuations can be significant, allowing for the expectation of high returns. However, the FSS stated that a high expected return also implies higher risk.

The FSS stressed that leveraged exchange-traded funds (ETFs) based on U.S. long-term government bonds are high-risk products with high market volatility and that losses can increase due to compounding effects the longer they are held. Furthermore, the FSS added that when investing in overseas bonds, exchange rate fluctuations and the economic conditions of the bond-issuing country must also be considered.

Additionally, when purchasing long-term bonds as over-the-counter bonds, early resale may not be possible. Over-the-counter bonds can only be sold early if the financial institution provides an early resale service or if the bonds are listed on an exchange even if purchased over-the-counter.

This content was produced with the assistance of AI translation services.