Define: Basis Point

Business, Legal & Accounting Glossary

Definition: Basis Point



What is the dictionary definition of Basis Point?

Dictionary Definition


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.


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Full Definition of Basis Point


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.

Bond

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

The interest on a bond is determined by two factors: duration and quality of credit. The maturity duration of a bond starts from a 90 day Treasury bill to a 30-year government bond.

Performance Index Paper (PIP)

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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Definition Sources


Definitions for Basis Point are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th March, 2020