Final answer:
The gain or loss on the sale of bonds is the difference between the selling price and the purchase price. Bond yield represents the expected rate of return, considering interest payments and possible capital gains. Changing interest rates can impact a bond's market value, affecting the gain or loss when sold.
Step-by-step explanation:
When bonds are sold, the gain or loss on sale is the difference between the selling price of the bond and its original purchase price. If the interest rate falls after a bond is issued, and the investor is locked into a higher rate, then the bond will sell for more than its face value, resulting in a capital gain. Conversely, if the interest rate rises and the investor is locked into a lower rate, the bond will sell for less than its face value, leading to a capital loss.
The bond yield is important as it represents the rate of return a bond is expected to pay at the time of purchase, including both regular interest payments and potential capital gains from selling the bond at a higher price in the future.
As a bondholder, one must consider the effects of changing interest rates on the value of bonds held and understand that the market value can fluctuate, impacting the realized gain or loss upon sale.