This Site Requires Javascript
Burger Menu

Basis Point

Definition

A basis point is one hundredth of a percent or equivalently one ten thousandth. The related concept of a permyriad is literally one part per ten thousand. Figures are commonly quoted in basis points in finance, especially in fixed income markets.

Basis Point

Understanding what Basis Point is

A Basis Point (BPS) is simply, in financial terms, a unit that is used to measure a percentage change in the rate or value of a certain financial component. Hundred basis points combine to make a 1% change in value; this means that one basis point is equivalent to the hundredth of a percentage change in the any financial instrument e.g. bonds yields and interest rates.

Basis points serve as a convenient unit if measurement in cases where even the minutest of percentage changes matter. Other units are not able to calculate a very slight change in value; for changes that are very small, like changes in the interest rate, basis points can easily be used to measure a small increase or decrease in the value.

This term can be better understood with the use of an example. Assume that the Federal Reserve Board decides to change the interest rates by 25 basis points, which means the rates have increased by 0.25%. Similarly, a bond whose yield has increased from 5% to 5.5% has actually risen by 50 basis points. Basis points are very commonly used as a unit of measurement in the bond market. The basis point serves as a reference to the yield that a bond entails.

The usage of Basis Points

Most financial institutes frequently use basis points when they want to denote a small change in the value of a financial instrument. This is very common in the case of taxes, fixed income securities and interest rates.

Understanding the application and purpose of basis points, and successfully being able to calculate the impact these points have on bonds, interest and credit cards is vital for securing financial stability of individuals as well as large financial organizations, such as banks.

Some bonds and loans may often be quoted in relation to a certain underlying security or index. In these cases their value will be spread over, or sometimes, under, the index. This is so because the term 'basis point' has been derived from ‘basis’ something that is spread between two things i.e. interest rates, in this case.


Further Reading

Margins of safety and weight of the argument in generating financial fragilityMargins of safety and weight of the argument in generating financial fragility
www.tandfonline.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

Global financial transmission of monetary policy shocksGlobal financial transmission of monetary policy shocks
onlinelibrary.wiley.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

An empirical comparison of published replication research in accounting, economics, finance, management, and marketingAn empirical comparison of published replication research in accounting, economics, finance, management, and marketing
www.sciencedirect.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

Trends in park tourism: Economics, finance and managementTrends in park tourism: Economics, finance and management
www.tandfonline.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

The financial and tax effects of monetary policy on interest ratesThe financial and tax effects of monetary policy on interest rates
onlinelibrary.wiley.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

Does performance-based managerial compensation affect corporate performance?Does performance-based managerial compensation affect corporate performance?
journals.sagepub.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

Financial valuation of guaranteed minimum withdrawal benefitsFinancial valuation of guaranteed minimum withdrawal benefits
www.sciencedirect.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

Raising climate finance to support developing country action: some economic considerationsRaising climate finance to support developing country action: some economic considerations
www.tandfonline.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …

Measuring the reaction of monetary policy to the stock marketMeasuring the reaction of monetary policy to the stock market
academic.oup.com [PDF]
… He formulated them as an endogenous process in which sustained economic stability produced financial … was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans … A 25 basis point change has a much different impact on margins of safety …


Tags

basis, points, point, rate, finance, rates, percentage, interest, definition, year, financial, percent, economic, yields, bonds, bank, yield, unit, economics, equal, bond, cash, measure, policy, income, month, benchmark, accounting, cuts, terms, hundredth, treasury, markets, term, fixed, change, percentages, 2020, capital, inflation, measurement, difference, academy, khan, time, tenure
Section 508

WCAG 2.0

Section 508