Bonds with low-risk ratings, such as government bonds, are generally classified as safe investment products, but investors should be aware that they can still incur losses due to price declines.
The Financial Supervisory Service (FSS) issued this advisory on July 6, noting that it continues to receive complaints from investors who suffered losses after investing in low-risk bonds based on the recommendations of sales staff.
For instance, some complaints allege that sales staff emphasized only the safety of government bonds without providing sufficient explanation regarding the risks of price fluctuations.
Even for low-risk bonds like government bonds, selling them before maturity can result in losses if market interest rates rise.
The valuation of a bond moves in the opposite direction to market interest rates.
Investors should also be aware that long-term bonds with a long remaining maturity can lead to unexpected losses if sold before maturity.
If long-term bonds do not align with an investor's remaining life expectancy or cash flow needs, the possibility of having to sell them early must be considered.
In particular, the longer the maturity of a bond, the greater the volatility of its valuation in response to changes in market interest rates.
The FSS advised that investors for whom principal preservation is critical, such as elderly retirees, should be mindful of the possibility of early sale when investing in long-term bonds.
Even market experts find it difficult to accurately predict long-term interest rate trends.
The FSS explained that because interest rate forecasting involves high uncertainty, making investment decisions based on the expectation of lower interest rates at the time of sale several years later may not be appropriate.
If interest rate predictions are incorrect, it may be difficult to sell at a desired price when needed.
Market interest rates can move in a different direction than the base interest rate.
Since bond prices are determined by market interest rates rather than the base rate, the base rate does not directly determine bond prices.
While market interest rates and the base rate generally move in the same direction, there are cases where they do not.
Additionally, when trading over-the-counter (OTC) bonds, investors should consider the difference between the fair market yield calculated by private bond pricing agencies and the actual trading yield.
When trading OTC bonds domestically, sellers typically set the purchase yield lower than the fair market yield (market interest rate) to account for labor and system costs, meaning investors purchase bonds at a price higher than the valuation based on the fair market yield.
The FSS explained that while the difference between the price based on the fair market yield and the actual purchase price based on the purchase yield may appear as a valuation loss, this is a result of reflecting the securities firm's transaction costs.
Before trading bonds over-the-counter, it is advisable to check if bonds with identical or similar conditions are being traded on the exchange and to compare unit prices and fees.
Purchase prices for OTC transactions may be higher than those for exchange-traded transactions.
However, it should be noted that exchange trading may not always have active price quotes, which can make it difficult to execute trades.
※
Copying, redistribution, and unauthorized use in AI training are strictly prohibited.