Understanding the Types of Interest Rates for Bond Investing
In our last installment, we discussed the credit risk and credit ratings of bonds. In our last installment, we discussed the credit risk and credit ratings of bonds. If a bond has even a slight risk of default, it should offer a higher interest rate compared to a risk-free bond as compensation for that risk. We previously explained that government bonds are considered virtually default-free. So, how is the interest rate on government bonds determined? And how much higher should corporate bond rates be compared to government bonds? In this session, we’ll explain the Bank of Korea's base rate, government bond rates, and corporate bond rates—what they are and how they are formed. The Fundamental Base Rate In Korea, the base rate is the interest rate applied when transactions occur between the Bank of Korea and financial institutions.* *More precisely, it is the 7-day repo rate, which is the rate applied to repurchase agreements between financial institutions as published by the Bank o...