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Basis point

In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of 5% is 50 basis points higher than an interest rate of 4.5%. Sometimes referred to as BPS, BIPS, and pronounced "Bips"

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basis point

A value equaling one one-hundredth of a percent ( ¹/₁₀₀ of 1%). Basis point is used to measure yield differences among bonds. For example, there is a 30 basis point difference between two bonds if one yields 10.3% and the other yields 10.6%.

Case Study On May 9, 2001, WorldCom, Inc., issued $11.9 billion of bonds in what at the time was the largest corporate debt issue in U.S. history. WorldCom's bond issue exceeded by $3.3 billion the previous largest issue, by Ford Motor Company two years earlier. Most of the proceeds from the WorldCom bond issue were to be used to pay down short-term debt, including $6 billion of commercial paper. The entire issue, which included maturities of 3 years, 10 years, and 30 years, was sold at an average interest cost of 7.6%. The 3-year bonds were sold to yield 6.566%, while the 10-year and 30-year bonds sold to yield 7.659% and 8.250%, respectively. The 30-year portion, maturing in May 2031, sold at a premium of 259 basis points, or 2.59 percentage points, above the 30-year Treasury yield of 5.66%. The 259 basis-point premium to long-term Treasuries indicated the substantial credit risk assumed by investors who purchased WorldCom bonds. The WorldCom issue took place during a painful period for telecom companies, and the firm's common stock price had declined by over 60% in the year prior to the debt issue. Intense competition caused the company's long distance operation to become a particular problem. The bonds were rated BBB+ by Standard & Poor's and A-3 by Moody's. Although the issue was a success, the firm's financial position continued to deteriorate, and a little more than a year later WorldCom was bankrupt.

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Basis point. Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only a few hundredths of a percentage point.

These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped 7 basis points.

Similarly, small changes in the interest rates charged for mortgages or other loans are reported in basis points, as are the fees you pay on various investment products, such as annuities and mutual funds. For example, if the average management fee is 1.4%, you might hear it expressed as 140 basis points.

Your percentage of ownership in certain kinds of investments may also be stated in basis points, and in this case each basis point equals 0.01% of the whole investment.