Will a bond's Yield to Maturity increase or decrease if there is a change in the bankruptcy code that makes it more difficult for bondholders to receive payments if the firm declares bankruptcy?
Assuming that this situation occurs after the Bond is issued and is trading in the secondary market. All things being equal, if the change is not already factored into the price or yield of the bond it would increase the YTM. However, for a AAA rated bond the increase will be much lesser than the increase on a low rated bond. Typic ally for a low rated bond the increase in YTM wouldn't matter much since the liquidity of it would decrease sharply if the firm were to go bankrupt.
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