Final answer:
The profit earned from the resale of a bond at a higher price than its purchase price is called a capital gain. This capital gain, combined with interest payments received, contributes to the bond's overall yield. Market fluctuations and interest rate changes can significantly affect the value and yield of bonds.
Step-by-step explanation:
The profit earned on the resale of a bond is known as capital gain. This occurs when a bondholder buys a bond at one price and later sells it at a higher price. The bond yield is the overall rate of return on the bond at the time of purchase, which includes not only the interest payments but also this capital gain. For example, if an investor purchased a bond for $964, received $80 in interest payments, and then sold the bond for its $1,000 face value, the yield would be calculated as ($1080 - $964)/$964 = 12%.
It is important to note that the market value of bonds can fluctuate based on changes in interest rates. When interest rates rise, bonds with lower interest rates tend to sell for less than their face value, leading to potential capital losses for the bondholder. Conversely, if the interest rates fall, bonds with higher interest rates can be sold for more than their face value, resulting in capital gains.