Final answer:
Pure discount bonds are sold at a discount and pay no interest, coupon bonds pay regular interest plus the face value at maturity, and perpetual bonds pay indefinite interest with no maturity. Interest rates heavily influence the value of these bonds.
Step-by-step explanation:
Distinguishing between pure discount bonds, coupon bonds, and perpetual bonds involves understanding their different structures and payment mechanisms.
Pure discount bonds are issued at a price lower than their face value and do not pay periodic interest. Instead, they are redeemed at their face value at maturity, with the difference between the purchase price and the face value representing the investor's return.
Coupon bonds provide regular interest payments, known as coupons, throughout the life of the bond. The face value is paid back to the investor at the maturity date along with the final interest payment. The coupon rate determines the size of the interest payments.
Perpetual bonds, also known as consols, do not have a maturity date and pay an indefinite stream of interest to the bondholder. Since they never repay the principal, their present value is calculated by discounting the perpetual interest payments.
Interest rates are a significant factor in determining the value of these bonds to investors, as they affect the present value of future payments.