Final answer:
The yield of a bond that has increased by 1/2% corresponds to an increase of 50 basis points. This reflects changes in market interest rates, affecting the bond's selling price but not its coupon rate.
Step-by-step explanation:
When the yield of a bond increases by 1/2%, it implies that the yield has increased by 50 basis points. A basis point is one hundredth of 1%, so 1/2% equates to 50 of these units. The yield of a bond is the rate of return it is expected to pay at the time of purchase, and it encompasses both interest payments and any potential capital gains.
It’s essential to note that the increase in yield does not affect the bond’s coupon rate, which is the interest rate paid by the bond's issuer on its face value. For instance, if you have a $1,000 bond with a coupon rate of 8%, this rate remains constant regardless of the market fluctuations. However, the price at which the bond is sold in the market may change due to varying interest rates, leading to a different yield.
If interest rates rise, bonds with lower interest rates will sell for less than face value. Conversely, if interest rates decrease, bonds with higher rates become more valuable, selling for more than their face value. Therefore, bond yields are a critical factor in determining the returns on investment for bondholders.