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| Basis Point |
A basis point is the smallest measure used in quoting yields
on fixed income products. You will also hear basis points mentioned when the
financial media releases reports on interest rates. The important thing to
understand is that one basis point is equal to one one-hundredth of one
percentage point (0.01%). Therefore, 100 basis points would be equivalent to one
full percent.
For example: An interest rate of 5% is 50 basis points greater
than an interest rate of 4.5%. Meanwhile, the difference between 12.83% and
12.88% is five basis points. When you read a headline such as "The Federal
Reserve cut interest rates by 25 basis points," this means that Fed lowered
rates by 0.25%.
