| one hundredth of one percent, as of interest rates, or investment yields. |
| basis point n. Abbr. BP One one-hundredth of a percent, used in measuring yield differences among bonds. |
Basis Point - BPS
A unit that is equal to 1/100th of 1%, and is used in denoting the change in a financial instrument. The basis point is commonly used for calculating changes in yield of a fixed-income security, interest rates and equity indexes.
Investopedia Commentary
The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
So, a bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points or interest rates that have increased by 1% are said to have increased by 100 basis points.
Related Links
Advanced Bond Concepts
Bond Basics Tutorial
See also: Basis Rate Swap, Bond, Federal Open Market Committee - FOMC, Interest Rate, Yield
Also spelled: BPS
basis point
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. |