Torn Between Investing in Corporate Bonds, Bank Deposits, and Stocks? (Must Read)

with the "stock investing" craze of recent years, many of us have had the experience of investing in a publicly traded company. But have you ever had the experience of turning on your stock app every 10 minutes or so, seeing blue lights, red lights, and sleepless nights?

i have a friend (A) who does just that. on the other hand, I also have a friend (B) who invests in "stocks" just like I do, but is comfortable with only checking the "interest deposited" notification once every three months.

why this difference? because "stocks" aren't the only way to invest in a corporation, and that's what we're going to talk about today: corporate bonds.

many people are tired of the volatility of the stock market and are looking for a more stable investment, and corporate bonds can be an attractive alternative.

in this post, we'll break down the A to Z of what corporate bonds are, how they differ from stocks as we know them, and how you can get started investing in corporate bonds.

table of Contents

• corporate bonds vs. stocks, the essential difference: do you 'own' or 'lend' money?

  • investing in stocks: the path to becoming an "owner" (partner) of a company

  • investing in Corporate Bonds: Becoming a Creditor (Lender) of a Company

• an Investor's Perspective: Why are Corporate Bonds "Stable"? (Anecdote)

  • scenario 1: When a company is incredibly successful (upside)

  • scenario 2: What happens to my money "if the company goes under"? (Downside)

  • "Stable" is not a "guarantee. corporate Bond Risk and Credit Ratings

• corporate Bond Investing in Action: 3 Steps to Get Started on Your Own

  • step 1: "When do I get paid?" Decide how interest is paid (coupon vs. discount bonds)

  • step 2: "How long should I wait?" Check the maturity

  • step 3: Buy from brokerage HTS/MTS (beginner's guide)

• investing in Corporate Bonds, Make Sure You Know This! (Advanced Class)

  • "Why are my bond prices falling while interest rates are rising?" (Seesaw Game)

  • what If You Can't Invest Directly? An Alternative: 'Bond ETFs'

• investing in Corporate Bonds: Frequently Asked Questions (FAQ)

corporate Bonds vs. Stocks, the Essential Difference: 'Own' or 'Lend' Money?

corporate bonds and stocks both have in common that they are issued by a 'corporation' to borrow money for its business, or 'corporate financing'. however, there is a fundamental difference in the nature of the money and the status of the investor.

investing in stocks: becoming an "owner" of a company

equity investing as we know it is a way for companies to raise 'equity capital'. investors become "shareholders" who put up money and in return have a "stake" (ownership) in the company.

• rights: Because you're an owner of the company, you can participate in its management (vote at shareholder meetings). if the company performs well, you have the right to take advantage of market appreciation in the share price, or receive a portion of the profits as a 'dividend'.

• liability: But if the company fails, you have no legal right to get your money back - there's no concept of principal repayment, and in the worst case scenario, you could lose your entire investment.

investing in corporate bonds: becoming a "lender" to a company

corporate bonds, on the other hand, are a way for a company to raise "other capital." In other words, the company "borrows" money from investors, who become "creditors" who lend the money and receive "borrowing certificates" (bonds) as proof.

• rights: You don't get to participate in the management of the company. Instead, you get the 'promised interest' specified in the contract (bond), paid at regular intervals (e.g. every three months), and the legal right to get the promised 'principal' back at the 'maturity date'.

• liability: No matter how successful the company becomes, investors cannot claim any additional returns beyond the promised interest.

the distinction stocks corporate bonds investor status shareholder (owner of the company) creditor (someone who lent you money) nature of funds equity (Equity) other capital (Debt) return on investment dividends (varies with profits) / Market gains committed interest (determined in advance) maturity (repayment of principal) none (you can only get your money back by 'selling') yes (principal repaid on maturity date) management participation yes (voting rights) not possible legal rights right to profit sharing claim to principal and interest payments

in the end, we can summarize that investing in stocks is investing in the "growth of a company" and investing in corporate bonds is investing in the "creditworthiness of a company" (its ability to fulfill its promises).

an Investor's Perspective: Why Are Corporate Bonds "Stable"? (Anecdotal)

many people refer to corporate bonds as "stable" investments. let's look at two extreme scenarios to see what this 'stability' really means.

scenario 1: When a company is incredibly successful (upside)

let's say a fictional company, AlphaTech, develops a revolutionary AI technology and its stock price skyrockets 10x in a year.

• stock investors: If you invested $10 million, you're now worth $100 million. you enjoy the rights of an "owner" who shares in the company's performance.

• corporate bond investor: If you buy 10 million won worth of 5% annualized corporate bonds of 'Alpha Tech', you only receive the promised interest of 500,000 won and the principal of 10 million won at maturity, regardless of the stock price explosion. in other words, you're completely cut off from the upside of growth.

scenario 2: What will happen to my money if "the company goes under" (downside)?

conversely, let's assume the worst case scenario: the "alpha tech" declares bankruptcy (default) due to poor management.

• the key: the difference in "repayment priority". when a company goes under, it has to sell its remaining assets (factories, buildings, cash, etc.) to pay back the money, and there's a legal order in which this happens.

• debtinvestors: As a 'creditor', you have a legal right to get your money back before the company's 'owners', the shareholders. Of course, if the remaining assets are less than the debt, you may not get 100% of your money back, but you're much more likely to get 70%, for example, than a shareholder.

• equity investors: "Shareholders" are last in line after all the debt feasts. they get paid when there's money left over after paying creditors, banks, employee salaries, etc., and there's usually no money left over in a bankrupt company. There's a very good chance that your $10 million investment will literally become a 'piece of trash' and turn into zero.

now the meaning of 'stability' becomes clear. 'Stability' in corporate bonds doesn't mean that the return is guaranteed, it means that if the worst happens (bankruptcy), my priority to get my money back (downside protection) is higher than with stocks.

"Stable" is not a "guarantee. corporate bond risk and credit ratings

here's the most important fact: "Stable" does not mean "guaranteed principal".

unlike bank deposits, corporate bonds are not protected by the Depositor Protection Act.

if a company "defaults" (fails to pay interest or principal) or goes bankrupt, investors can lose all of their money (0-100%). this is the biggest 'corporate bond risk', or 'credit risk', that corporate bonds have.

so how do you know if this company won't go under, or if it has the ability to pay you back?

the answer is to check the 'credit rating'.

credit rating agencies (Korea Credit Rating, Nice Credit Rating, etc.) analyze a company's financial condition, cash flow, business prospects, etc. and assign a rating.

• AAA: The highest rating. the highest level of debt repayment capacity (e.g., top-tier public companies, banks)

• AA to A: Superior ratings. excellent repayment capacity, but more likely to be affected by future environmental changes than AAA.

• BBB: Investment grade. ability to repay is recognized, but there is risk in the event of a deterioration in economic conditions.

• BB and below: Speculative grade (junk bonds).

the lower the rating (riskier), the higher the interest (interest rate) offered to investors.

corporate bond investing in action: 3 steps to get started on your own

now that you know the 'bond investing basics', let's take a look at 'how to actually invest in corporate bonds' in 3 steps.

step 1: "When do I get paid?" Decide how interest is paid (coupon vs. discount bonds)

corporate bonds fall into two main categories based on how they pay interest

1. coupon Bonds: this is the most common form. it pays a series of promised interest payments at set intervals (e.g., 3 months, 6 months) and returns the principal at maturity. it's perfect for investors who want to create a steady cash flow, much like a landlord collecting rent.

2. discount Bond: You buy a bond cheaply with the interest discounted (prepaid) up front. for example, you buy a bond that pays 10,000 won at maturity for 9,500 won. there is no interest payment in the middle, but you receive 10,000 won at maturity, so the difference (500 won) is your interest income. this is an advantage for investors who want to put their money away until maturity and get it all at once.

step 2: Check the "How long do I want to wait?" maturity

the 'corporate bond maturity' is the promise of when you will get the money you lent back. it can vary widely: 1 year, 3 years, 5 years, 10 years, etc.

in general, the longer the maturity (the longer you lend the money), the higher the interest rate because there's more uncertainty. but that also means you're exposed to "interest rate risk" for longer, which we'll talk about later.

if you're a novice investor, it's a good idea to start out with high-quality (A-rated or higher) corporate bonds with relatively short maturities (1-3 years) to get your feet wet.

step 3: Buying from brokerages HTS/MTS (beginner's guide)

"Where do I buy corporate bonds?"

surprisingly, you can buy them from the very same brokerage house where you trade stocks - HTS (PC) or MTS (mobile app).

1. go to your brokerage firm's app and go to the "Financial Instruments" or "Bonds/RP" menu.

2. select 'On-Market Bonds' or 'OTC Bonds' (for real-time trading on MTS/HTS, it is usually 'On-Market Bonds')

3. search for the desired corporate bond (by ticker or rating) as you would for a stock.

4. pay close attention to the interest rate (yield), maturity date, and credit rating.

5. just like placing a stock order, enter your desired 'price' and 'quantity' and hit the 'buy' button.

"Aren't corporate bonds only for high net worth individuals?"

this used to be true, with minimum investment amounts of 5 million won or even 100 million won, but recently, the minimum investment amount has been significantly lowered to 5,000, 10,000, and 100,000 won, making corporate bond investing accessible to everyone.

investing in corporate bonds, you must know this (advanced class)

the most common mistake beginners make when starting to invest in corporate bonds is not understanding the relationship between 'interest rates' and 'bond prices'.

"If interest rates are going up, why are my bond prices going down?" (The Seesaw Game)

the bottom line is that market interest rates and bond prices move in opposite directions, like a seesaw.

to make it easier to understand, let's tell a story.

1. last year: You bought a 3-year corporate bond from Company A for 10,000 won, paying 3% interest per annum.

2. today: Suddenly, the Bank of Korea raises its key interest rate (market interest rates rise)

3. the result: the new bond issued by Company A today pays 5% interest per annum to reflect the higher interest rate.

now you want to sell your 3% "old bond" that you bought last year before it matures. But why would other investors in the market buy your 3% "old bond" for 10,000 won (list price) when they can buy a 5% "new bond" for 10,000 won?

of course not. You have to lower the price to sell your 'old bonds' (say, to 9,500 won). this is so that the investor who bought it at 9,500 won can earn a similar return to the 5% 'new bond' by adding the 500 won difference plus 3% interest.

• conclusion: Market interest rates rise → existing (old) bonds become less attractive → existing bond prices fall

• converse: Market rates fall → existing (old) bonds become more attractive → existing bond prices rise

this price decline is irrelevant if you hold it until 'maturity', because you get your 10,000 back at maturity. It is only when you 'sell' before maturity that you lose or gain from this price change.

what if you don't want to invest directly? An alternative called 'bond ETFs'

"Ratings, maturities, interest rates... it's too complicated."

there's an alternative for you. it's called a "bond fund" or "bond ETF".

• theadvantage: The asset manager's experts "diversify" your investments across dozens or hundreds of different corporate (or government) bonds. the "credit risk" of individual companies can be significantly lowered, and you don't have to analyze them individually.

• cons: You'll pay a 'management fee' for having a professional manage your money, and crucially, while individual bond investments are tax-free on 'capital gains' (market gains), bond ETFs are subject to a 15.4% tax on capital gains (dividend income tax).

investing in Corporate Bonds: Frequently Asked Questions (FAQs)

finally, here are some frequently asked questions about investing in corporate bonds.

Q1: Is investing in corporate bonds a 100% guaranteed return of principal?

A: No. This is the most important point in the 'Bond Investing Basics'. unlike bank deposits, corporate bonds are not covered by the Depositor Protection Act. If the issuing company goes bankrupt or defaults, you could lose all or part of your investment.

Q2: Do I have to hold corporate bonds unconditionally until maturity?

A: No. Bonds traded 'over-the-counter' through stockbrokers MTS/HTS can be freely sold before maturity, just like stocks. however, depending on the 'market rate' at the time of sale (the 'seesaw game' principle described earlier), the price of the bond may fluctuate, resulting in a profit or loss. (Some 'over-the-counter' bonds may be difficult to sell)

Q3: What is the minimum investment amount?

A: In the past, it was inaccessible because it was in the millions to hundreds of millions of won, but recently, it has become very accessible to individual investors because you can invest as little as 5,000, 10,000, 100,000 won, etc.

Q4: Is it impossible to invest in corporate bonds with a BBB rating?

A: No, bonds rated up to 'BBB' are classified as 'investment grade'. it means that the company has the ability to repay its debts, but there is a risk associated with future changes in the environment compared to an 'A' rating or higher. To compensate for the risk, investors typically receive a higher return.

conclusion and call to action (CTA)

today we took an in-depth look at the investment instrument called 'corporate bonds'.

key takeaway: Investing in corporate bonds is not a "high-yield jackpot", but rather a good "defender" that compensates for the volatility of equity investments by aiming for "stable interest income".

which do you need more of in your investment portfolio right now: offensive "stocks" or defensive "corporate bonds"?

if you have experience investing in corporate bonds or have more questions, feel free to leave them in the comments.

if you enjoyed this article, please subscribe and give us a thumbs up (♥) to help us create more great content!