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%.
176 exam-style questions on AQA A Level Economics 2.4 Financial markets and monetary policy (A-level only), covering 2.4.1 The structure of financial markets and financial assets, 2.4.2 Commercial banks and investment banks, 2.4.3 Central banks and monetary policy, and 2.4.4 The regulation of the financial system. Each one has a worked solution and a mark scheme showing where the marks go.