Business, Legal & Accounting Glossary
Basis point (bp) is a unit that is equal to 1/100th of a percentage point. In economics, the basis point is employed to describe a change in a financial instrument. It is used in case of equity indexes and interest rates. Basis point also denotes the yield of a fixed-income security.
When changes in interest rates are quoted in basis points, it is always understood this indicates an absolute change in the rate. This avoids the ambiguity that arises when changes in interest rates are quoted as percentages. To illustrate, if an interest rate were 5%, and we were told the rate rose one per cent, it wouldn’t be clear whether the change was absolute, rendering a new rate of
5% + 1% = 6%
or relative, rendering a new rate of
5%(1 + .01) = 5.05%
If instead we were told the rate rose 100 basis points, we would know the change was absolute and that the new rate must be 6%.
Yields on fixed-income securities fluctuate regularly but may change only within hundredths of a percentage point. These small variations are measured in basis points, with the smallest unit being 1 basis point. One basis point equals 0.01% or one-hundredth of 1%. One per cent equals 100 basis points. If the yield on a bond increases from 5.10% to 5.11%, its yield has risen by 1 basis point. If a bond’s yield falls from 5.50% to 5.49%, its yield has fallen by 1 basis point. A basis point is also used to measure interest rate changes. An interest rate of 4.00% is 1 basis point greater than an interest rate of 3.99%. When the US Federal Reserve holds it’s Federal Open Market Committee (FOMC) meetings, it announces changes in its federal fund’s rate target in terms of the basis point change.
The mathematical relationship between basis points and percentage changes is represented as 1% change=100 basis points 1 basis point=0.01%
For example, if the yield of a particular bond gains to 2.2% from 2%, then the bond is said to increase by 20 basis points. An increase of 1% translates into an increment of 100 basis points. Basis points are preferred for their concise way to illustrate minor percentage changes in specific financial components. The unit is important for investors to trade and judge the quality of a particular stock. Small differences may translate into large gains or profits for investors who make a profit (or loss) by playing the stock market on large volumes.
It is a kind of debt investment that involves an investor to loan money to a government or corporate entity. The entity borrows the money for a predetermined time period at a fixed interest. Bonds are preferred by central and state governments, and companies to fund developmental projects. They are fixed income securities. college term paper
It is a short term paper where the denominated rate is paid in base currency. The rate movement of Performance Index Paper (PIP) is dependent on the exchange rate with an alternative currency. It is a commercial paper variance of currency coupon swap.
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This glossary post was last updated: 16th April, 2020 | 1 Views.