Wednesday Apr 12 2023 09:05
2 min
What are basis points?
Basis points are a standard unit used in finance to express differences between interest rates, yields, or trading prices. They are equal to 0.01 percent or 0.0001 and are typically used in securities trading and foreign exchange to measure small percentage changes in financial assets or liabilities.
Fractional basis points are expressed in multiples of one-hundredth of a basis point. For example, 0.0125 would represent 1.25 basis points or 125 fractional basis points.
Basis points in interest rates are expressed as a change in the yield to maturity, which is a way of estimating the return of an investment based on the cash flows it will generate.
This includes both interest payments and any capital gains. For example, a 5 basis point rise in interest rates would indicate a 0.05 percent rise in yield.
Basis points are also used to measure changes in bond yields. For example, if a 10-year US Treasury Bond yield increases by 25 basis points, this would mean that the yield has risen by 0.25 percent from its original level.
Basis points can have a significant effect on traders and their strategies. For example, a trader may decide to purchase a bond with a lower yield than its current market price, if they expect a basis point drop in yields. This could potentially make them money if the bond yields fall by the predicted amount.
When dealing with basis points, it’s important to remember that they must be converted into a percentage before they can be used in calculations. To do this, you must divide the number of basis points by 10,000. For example, if a bond has a yield of 75 basis points, the percentage yield would be 0.75 percent (75 divided by 10,000).
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