What Are Municipal Bonds and Special Bonds
Did you know that when you buy an apartment or register a car, you're buying a 'bond' without even realizing it? That's a local bond. But there's a big difference in taxes compared with U.S. municipal bonds.
Local bonds and special bonds: who issues them
Korean bonds are classified by 'who issued them.' If the state issues, it's a government bond; if a local government issues, it's a local bond; if a public institution established by special law issues, it's a special bond.
Local bonds are issued by local governments—special cities, provinces, cities, counties—based on the Local Finance Act. Urban-railway bonds that fund subway construction, regional-development bonds for local development funds, and publicly offered local bonds fall into this category.
Special bonds are bonds issued by institutions established by special law, such as Korea Electric Power, Korea Expressway Corporation, and Korea Gas Corporation. KEPCO bonds, expressway-corporation bonds, and gas-corporation bonds are representative.
Source: Kyobo Securities, Hanwha Investment & Securities bond guides. Local and special bonds are distinguished by the issuing entity (local government vs. public institution).
The local bonds we buy without realizing
Many people think 'I've never bought a bond,' but in fact most of us buy a local bond at least once.
When you buy a home and register it, or when you register a car, there are bonds you must buy by law. If you register real estate in Seoul you must buy urban-railway bonds; in the provinces you must buy regional-development bonds, and so on. Because these bonds are sold 'attached' to another transaction, they're also called compulsory (attached) bonds.
This money is used for public projects like subway construction and regional development. Because their interest rate is usually lower than the market, many people resell them at a slight loss right after buying.
Source: Korea Consumer Agency (KCIE) guidance. For urban-railway bonds, the local government bears the primary repayment obligation, and if it falls short, the central government backs the principal-and-interest repayment through local grant taxes.
The tax benefit of U.S. municipal bonds (note: different from Korea)
In the U.S., municipal bonds ('munis') are famous for a special tax benefit.
The U.S. often exempts interest income on municipal bonds issued by state and local governments or their subordinate agencies from federal income tax (sometimes even state and local taxes). That's why they're popular with investors who pay a lot of tax.
Here's where Korean investors easily get confused. Korea's local and special bond interest does not have this broad tax exemption. Just like other ordinary bonds, it's subject to interest income tax (15.4% withholding). You must clearly distinguish that 'local bond = tax-free' is a U.S. story and does not apply as-is to Korea.
Source: Wikipedia (Municipal bond, U.S. tax exemption), PwC Korea (interest income taxation). You must not apply the U.S. municipal-bond tax exemption to Korea's local and special bonds as-is.
Even if it looks safe, there is risk
Local and special bonds are considered relatively safe, next to government bonds. That's because they're issued by local governments or public institutions, often with government guarantees or support behind them.
But 'relatively safe' is not 'risk-free.' If the issuing institution's finances worsen, credit risk can arise, and not all special bonds carry an explicit government guarantee. Also, when rates rise, their prices fall like other bonds, so you can take a loss if you sell before maturity.
In the end, local and special bonds too should be judged after checking 'who is issuing, with what guarantee, and how much interest.'
Preguntas frecuentes
Q. Are Korean local bonds tax-exempt like in the U.S.?
No. This is the most common misconception. U.S. municipal bonds (munis) often have tax-exempt interest income, but Korea's local and special bond interest is subject to interest income tax (15.4% withholding) just like ordinary bonds. The saying 'local bonds are tax-free' describes the U.S. system and does not apply to Korea as-is.
Q. Are local and special bonds as safe as government bonds?
They're rated relatively safe, next to government bonds, but not exactly the same. Risk differs by the credit of the local government or public institution, and not all special bonds carry an explicit government guarantee. Also, when rates rise their prices fall, so you can take a loss if you sell midway; it's important to check the issuing entity and whether there's a guarantee.
Páginas relacionadas
📋 Los resultados se basan en datos históricos; las rentabilidades pasadas no garantizan rentabilidades futuras.
📋 Este servicio se ofrece con fines educativos para ayudarte a entender la inversión, no como asesoramiento de inversión.