Basis Point
A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. It is equal to 1/100th of 1%, or 0.01%, and is used to denote the percentage change in a financial instrument. For example, a change of 25 basis points in the yield of a bond would mean that the bond’s yield has increased by 0.25%. Basis points are also used to describe the change in interest rates, and are commonly used to measure the spread between two interest rates, such as the spread between the federal funds rate and the prime rate.
History of Basis Point
The term basis point was first used in the early 20th century by bond traders to describe the smallest change in the price of a bond. It was later adopted by the banking industry to describe the smallest change in the interest rate of a loan or deposit. The term is derived from the Latin phrase “basis punctum”, which translates to “point of basis”. The term has since been adopted by the financial industry to describe the smallest change in the value or rate of a financial instrument.
Comparisons
| Basis Points | Percentage |
|---|---|
| 1 | 0.01% |
| 10 | 0.1% |
| 25 | 0.25% |
| 50 | 0.5% |
| 100 | 1% |
Summary
Basis points are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. It is equal to 1/100th of 1%, or 0.01%, and is used to denote the percentage change in a financial instrument. For example, a change of 25 basis points in the yield of a bond would mean that the bond’s yield has increased by 0.25%. More information about basis points can be found on websites such as Investopedia, The Balance, and Bankrate.
See Also
- Yield
- Interest Rate
- Spread
- Prime Rate
- Federal Funds Rate
- Bond Price
- Yield Curve
- Interest Rate Swap
- Interest Rate Risk
- Duration
