Basis point
One hundredth of a percentage point. A move from 4.00% to 4.25% is 25 basis points; a move from 4.00% to 6.00% is 200.
Example
A spread of 2.3847 percentage points over a government bond is quoted as 238 basis points.
Important
The unit exists because differences of a few hundredths of a percent are the substance of fixed income. Confusing a basis point with a percentage point is a factor-of-a-hundred error, and it happens most often in a hurry.
Related terms
- Credit spread — The difference between a bond's yield and that of a government bond of the same currency and maturity. It is the market's price for the default risk, the illiquidity and any adverse options the government bond does not carry.
- Yield to maturity — The single discount rate at which the present value of a bond's remaining cash flows equals its current price. It has no closed-form solution for a multi-period bond and is found numerically.
- Duration — The present-value-weighted average time until a bond's cash flows are received (Macaulay duration), and by extension the measure of how much its price moves when yields change. Modified duration is Macaulay duration divided by one plus the yield.
Lessons that explain it
All 578 terms in the Investing glossary