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A basis point (often denoted as bp, bps or ‱; rarely, permyriad) is a unit that is equal to 1/100th of 1%. It is commonly used to denote the change in a financial instrument, or the difference (spread) between two interest rates; although it may be used in any case where percentages are used, it is used for convenience when quantities in percentage points are small. It also avoids the ambiguity between relative and absolute discussions about rates: does a "1% increase" in a 10% interest rate mean that it goes from 10% to 10.1%, or to 11%? Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ...
The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. The type of interest rate has to be specified (e.g., bond yield, zero-coupon yield, Act/360 money market rate, Act/365 money market rate, etc). An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ...
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In financial economics, the yield of a financial instrument/security (finance), usually a debt instrument, or other investment is the rate of return the holder earns on that instrument. ...
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In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ...
Zero coupon bonds are bonds which do not pay periodic coupons, or so-called interest payments. ...
In finance, a day count convention is a method to calculate the fraction of a year between two dates. ...
This article is about short-term financing. ...
In finance, a day count convention is a method to calculate the fraction of a year between two dates. ...
Since certain loans and bonds may commonly be quoted in relation to some index or underlying security, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest of 0.50% above LIBOR is said to be 50 basis points over LIBOR. LIBOR stands for the London Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale (or interbank) money market. ...
Examples
A rate change from 5% to 6%, reflects a change of 1% or 100 basis points (Note 5% to 6% is actually a 20% increase: by using basis points, it is clear that the change in rate as an absolute number is being discussed.)
A rate change from 6.7% to 6.9% reflects a change of .2% or 20 basis points. A rate change from 2.75% to 3.20% reflects a change of .45 or 45 basis points
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