This study shows the following results, by analyzing the determinants offoreign investors’ domestic bond investment and their impacts on the Koreanbond market. First of all, foreigners’ bond investment depends on arbitragetrading opportunities and country risks. The foreign bond investment hasjumped in a large scale after the 2nd half of 2007. This is mainly due to theexpansion of arbitrage trading opportunities and higher sensitivity to thoseopportunities. The increase of foreign investment was also led by thegovernment’s capital control. Furthermore, foreigners have influenced theKorean domestic bond market since the 2nd half of 2007 in quite differentways. Our study suggests that in the course of capital liberalization, thegovernment’s direct capital control may have little or even adverse effects,depending on foreigners’ responses. The government should consider theforeign investors’ behaviors carefully when executing financial and exchangerate policies.