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If I get a device running an older version of WP and update it, then have a reason to do a factory reset, will it reset the phone exactly to the initial state or will the OS remain at the updated newer version?

Similarly does a phone backup include the OS version or will it just try to restore all the apps and settings on whichever OS version is currently installed on the phone?

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Doing a factory will not modify the version of your Operating System. Your OS will remain in the newer version. I know it from my personal experience. I have done factory reset on Windows Phone 8.1 and Windows 10 mobile. Both the resets didnot alter my OS versions.

Restoring a backup will not change your OS version either. It will just restore the settings, your data, etc... The backup will not change your OS version.

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