Basis Points

Basis points are the number of points often used to quote changes in yields on bonds or the difference in rates as quoted between the yields on two bonds. Basis points are the number of points equal to .01% or 1/100th of 1%, so, for example, a 5% rate change in a bond or other fixed income instrument is a change of 500 basis points. A price change in a bond that caused the yield to increase by 0.5% to 5.5% from 5.0% has a yield change of positive 50 basis points, and a bond that moves from 5.0% to 4.5% has a yield change of negative 50 basis points. Basis points are used to quote changes in financial indexes including both equity and bond indexes and interest rate changes: “the prime rate rose by 50 basis points after the Federal Reserve Board meeting”. Spreads between two fixed income instruments are also quoted in basis points: “the offering came at a 150 basis points spread versus the 10 Year government bond.”