A bond is a debt instrument. When an investor issues a bond to a company or government, they are lending out money equivalent to that bond’s face value. The holder of the bond negotiates the premium payments that he or she will pay the issuer on a monthly or quarterly basis. The periodic interest payments can also be paid semi-annually.
Since bonds are high-value debts, the investor has to be compensated for parting with a huge chunk of his or her wealth. The investor could have used that money for another project, but they decided to lend it out. Regular interest payments make sure that the issuer is always liquid.
Another reason why periodic interest payments are important is the time value of money. The interest rates of bonds remain fairly stable throughout the years. Unfortunately, the economy is not so stable. There are periods of growth and decline. As a result, the prices of commodities change. In most cases, prices move upwards. If the investor doesn’t receive periodic interest payment, their purchasing power declines. Money paid today is better than cash paid at a later date, because currency loses value with time.
The other disadvantage of not receiving regular periodic interest payments is that it becomes difficult for the investor to sell the bond to another party. This is because the buyer has to pay the seller the principal amount plus accrued interest payments. If the unpaid interest amount is a lot, the bond may become too expensive for the buyer.