Government Bonds' Return Now Outpaces Private Paper

Government bonds are again becoming an attractive financial instrument for long-term investors. After interest rates again turned up, after-tax yields on government bonds are higher than after-tax yields on bank deposits or on banks' subordinated bonds.

For example, the yield on the first-class housing bond issued by the government is 7.5 percent before taxes. If an investor purchases 100 million won ($76,900) of those bonds, he will net 33.31 million won over five years for an after-tax yield of about 6.7 percent.

On the other hand, if an investor buys 100 million won of subordinated bonds issued by Korea Exchange Bank, which has the highest pre-tax yield among new subordinated bonds at 8.2 percent, the investor will get 32.54 million won after five years. The after-tax yield is about 6.5 percent.

Tax rules are different for government bonds and subordinated bonds. Subordinated bonds are taxed on their yield, but government bonds are taxed on their coupon rates.

"Government bonds are popular, especially among investors focusing on safety, because of the government guaranteed redemption of principal and interest," said an official at Tong Yang Securities.

by Rah Hyun-cheol