Basis Point Reference and explanation

Description

Basis Point is a unit that determines changes in bond yields which usually refer to change in annual rate of return or yield to maturity for a bond. One basis point is equal to 1/100th of 1% or simply 0.01%.

To understand basis point, consider an example scenario where Federal Reserve Board has raised interest rate by 20 basis points. This would imply that the there is a 0.20% rise in interest rate.

In case of a bond, basis point reflects change in yield. Therefore if price for a bond is raised by 25 basis points when its yield was at 12.20% initially, it implies that the yield has moved from 12.20% to 12.45%.

 

 

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