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Yields on fixed-income securities fluctuate regularly, but may change only within hundredths of a percentage point. These small variations are measured in basis points, with the smallest unit being 1 basis point. One basis point equals 0.01%, or one-hundredth of 1%. One percent equals 100 basis points. If the yield on a bond increases from 5.10% to 5.11%, its yield has risen by 1 basis point. If a bond’s yield falls from 5.50% to 5.49%, its yield has fallen by 1 basis point. A basis point is also used to measure interest rate changes. An interest rate of 4.00% is 1 basis point greater than an interest rate of 3.99%. When the US Federal Reserve holds its Federal Open Market Committee (FOMC) meetings, it announces changes in its federal funds rate target in terms of the basis point change. |
