Hold Korea's Individual Treasury Bond for its full 20-year term and the pre-tax return is 161.8%. The "8.1% annual average" printed next to that figure is simply 161.8 divided by 20; the actual compound annual rate is 4.93%. Only the second number can sit beside a bank deposit or another bond for comparison.
The 3.2 percentage-point gap comes from one thing. The bond compounds — interest rides on principal until maturity, so the yearly interest amount grows toward the end. Dividing the total by the number of years spreads that back-loaded interest evenly across year one. The longer the term, the bigger the illusion.
On top of that, the spread over the coupon is reset every month. Line up the April subscription against the September subscription and back-calculate, and the applied rate on the long maturities barely moves at all.
Where 8.1% a year becomes 4.93% a year
September's disclosed pre-tax returns for holding to maturity were 11.3% for the 3-year coupon bond, 11.8% for the 3-year compound bond, 22.8% at 5 years, 59.3% at 10 years and 161.8% at 20 years. The annual averages shown in brackets — 3.8%, 3.9%, 4.6%, 5.9% and 8.1% — are all the total divided by the number of years. Converted to a compound annual rate, they change like this.
| Term / type | Total pre-tax return at maturity (%) | Disclosed annual average (%) | Compound annual rate (%) | Gap (pp) |
|---|---|---|---|---|
| 3-year compound | 11.8 | 3.9 | 3.79 | 0.11 |
| 5-year | 22.8 | 4.6 | 4.19 | 0.41 |
| 10-year | 59.3 | 5.9 | 4.77 | 1.13 |
| 20-year | 161.8 | 8.1 | 4.93 | 3.17 |
The conversion is the nth root of one plus the total return, minus one. For the 20-year bond, the 20th root of 2.618 is 1.0493, giving 4.93%. The 3-year gap is only 0.11pp; the 20-year gap is 3.17pp. Total return grows faster than the term does, and simple division drags that acceleration forward.
The 3-year coupon bond's 11.3% works differently. Interest is paid out each year rather than added to principal, so 11.3 divided by 3 — 3.77% — is the simple rate itself. That the compound version of the same 3-year bond pays 0.5pp more is exactly the size of three years of compounding.
Tax pulls the compound rate down again
Bonds of 5 years or longer held to maturity qualify for separate taxation on interest income up to a cumulative 2 billion won of purchases per person, at 15.4% including local income tax. Because interest arrives in one lump at maturity, applying that rate to total interest and re-converting gives the following.
| Term | Pre-tax total (%) | After-tax total (%) | After-tax compound annual (%) | Gap vs disclosed average (pp) |
|---|---|---|---|---|
| 3-year compound | 11.8 | 9.98 | 3.22 | -0.68 |
| 5-year | 22.8 | 19.29 | 3.59 | -1.01 |
| 10-year | 59.3 | 50.17 | 4.15 | -1.75 |
| 20-year | 161.8 | 136.88 | 4.41 | -3.69 |
The 3-year bond is excluded from the separate-taxation provision, so its row reflects only the 15.4% withholding. If maturity lands in a year when total financial income exceeds 20 million won, that interest is rolled into comprehensive taxation. Why separate taxation matters for aggregation rather than for the headline rate follows the same structure covered in the piece on the conditions for 9% separate taxation on REIT dividends.
When the coupon rises, the spread is cut
The applied rate is the coupon rate plus the spread. The coupon tracks the auction yield on the previous month's government bond of the same maturity, while the spread is set fresh and published every month. April's coupons were 3.470% at 3 years, 3.735% at 5, 3.695% at 10 and 3.840% at 20, with spreads of 0%, 0.1%, 1.05% and 1.1%. September's spreads were 0%, 0.1%, 0.35% and 0.35%.
September coupons were not published, but they can be recovered from the disclosed maturity returns: the compound annual rate above is the applied rate, so subtracting the spread leaves the coupon.
| Term | Apr coupon (%) | Apr spread (%) | Apr applied (%) | Sep coupon (derived, %) | Sep spread (%) | Sep applied (%) | Change in applied (pp) |
|---|---|---|---|---|---|---|---|
| 3-year compound | 3.470 | 0 | 3.470 | 3.79 | 0 | 3.79 | +0.32 |
| 5-year | 3.735 | 0.10 | 3.835 | 4.09 | 0.10 | 4.19 | +0.36 |
| 10-year | 3.695 | 1.05 | 4.745 | 4.42 | 0.35 | 4.77 | +0.03 |
| 20-year | 3.840 | 1.10 | 4.940 | 4.58 | 0.35 | 4.93 | -0.01 |
Over five months the 10-year coupon rose 0.72pp while its spread was cut 0.70pp, moving the applied rate by 0.03pp. The 20-year coupon rose 0.74pp and its spread fell 0.75pp, so the applied rate actually slipped 0.01pp. The 3-year and 5-year bonds, whose spreads are pinned at 0% and 0.1%, passed the coupon increase straight through and gained 0.32 to 0.36pp.
The spread is not a bonus handed to long-term holders. It is being used as a lever that keeps the maturity return in the same place while market rates move underneath it.
Against the activation plan announced last year, which promised to widen the 10-year and 20-year spreads to 100bp or more, September's 0.35% is a third of that — largely because the coupon itself has climbed. Reading a single month's spread as a better or worse deal therefore points the wrong way. The one figure worth comparing is the applied rate.
You can sell after a year, but three things vanish
Early redemption can be requested one year after purchase. Redeem, however, and the spread, the compounding and the separate-taxation benefit all drop away, leaving only the coupon. Feed that condition in and the cost of leaving early becomes calculable.
Take September's 10-year bond redeemed in year five. The 4.42% coupon applies on a simple basis, so five years of interest comes to 22.1% — below the 22.8% earned by holding the same month's 5-year bond to maturity. With the 0.35% spread and five years of compounding both stripped out, choosing the longer maturity buys nothing. Redeeming the 20-year bond in year ten gives 45.8% at a simple 4.58%, some 13.5pp short of the 10-year bond held to term.
Choosing a maturity is therefore not a call on rates but a question of how long the money can stay locked up. Once only the coupon remains, the product has no advantage over a plain government bond of the same term. How identical pre-tax yields diverge after tax is covered in the piece on calculating after-tax returns on low-coupon bonds.
The 200-million-won cap and the 3-million-won allocation line
The separate-taxation cap is a cumulative 200 million won of purchases per person, filled in order of earliest maturity. The disclosure states the tax benefit applies to purchases made through 31 December 2027 under the Restriction of Special Taxation Act, so as things stand it is a provision with an expiry date.
Subscriptions are allocated in full up to a reference amount of 3 million won, with anything above that split in proportion to the amount applied for. September's issuance totalled 230 billion won: 2 billion in 3-year coupon bonds, 3 billion in 3-year compound bonds, 50 billion at 5 years, 110 billion at 10 years and 65 billion at 20 years. Cumulative subscriptions through August reached roughly 2.29 trillion won at an average ratio of 1.62 to 1. Apply 3 million won or less and the ratio is irrelevant; above it, the ratio sets the allocation.
From September the 10-year and 20-year bonds can also be bought inside DC and IRP retirement accounts. There, tax on interest is deferred through the holding period and a low pension income tax applies on withdrawal — a different timing of taxation altogether from the 15.4% levied in a dedicated account.
What to watch
- The monthly published spread — whether the pattern of cutting it in months when the coupon rises continues
- The compound annual value of the applied rate — the only figure that can be set against deposits and government bonds
- Whether a quoted "annual average" is simple division or compounding — a gap of over 3pp at 20 years
- Any extension of the separate-taxation deadline for purchases made through 31 December 2027
- The order in which the 200-million-won cap fills — earliest maturity first, so short terms bought early push long ones out
- Monthly subscription ratios and the 3-million-won full-allocation line
- The one-year mark for early redemption, and what disappears if it is used
Sources
- Mirae Asset Securities opens September Individual Treasury Bond subscriptions through the 15th (Weekly Hankooki)
- Individual Treasury Bonds: 210 billion won issued in April, including a 3-year coupon bond (Economic Post)
- Individual Treasury Bond guide — separate taxation and early redemption terms (Mirae Asset Securities)
- Two trillion won of Individual Treasury Bonds next year, with a new 3-year maturity (Korea Policy Briefing)