Only in Gemfile.lock. If you've hard-coded a version in Gemfile, you'll need to update it.

Eg. These will update fine:

    gem "rails"
    gem "rails", "~> 3.2"

This wont:

    gem "rails", "= 3.2.10"

No, bundle update only updates the Gemfile.lock

If your gemfile looks like:

    gem 'rails', '3.2.10'

Then `bundle update` does nothing.