A pension fund holds a portfolio of long-dated government bonds (gilts) with a face value of £1,000 £1,000\,£1,000 and a fixed annual coupon of £40£40£40. Due to rising market interest rates, the market price of these gilts falls from £1,000 £1,000\,£1,000 to £800£800£800. What is the resulting change in the current yield of these gilts?
It decreases from 5%5\%5% to 4%4\%4%.
It increases from 4%4\%4% to 5%5\%5%.
It remains constant at 4%4\%4% because the annual coupon payment and face value are fixed.
It increases from 4%4\%4% to 6.25%6.25\%6.25%.
