A measure of the change in the price of a bond
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What is Basis Point Value?
Basis point value is a measure of the change in the price of a bond that can be attributed to the per unit change in the yield of the given bond. Therefore, it is a measure of the price volatility of bond prices to 0.01% or 1 basis point change in the yield.
Summary
- Basis point value of a bond is a measure of the price volatility of bond prices to 0.01% or 1 basis point change in its yield.
- Bond yields and their prices share an inverse relationship. Factors such as yield to maturity, coupon rate, and face value impact the relationship between the yield and price of the bond.
- A larger basis point value implies a bigger change in the price of the bond.
What is Bond Yield?
Bond yield can be defined as the return realized by the investor when he/she purchases a bond. The return comprises coupon payments over the term of the bond, which is the interest payable by the borrower or bond’s issuer.
The par value of the bond must also be repaid by the issuer on the date of maturity. Therefore, bond yield can be calculated by dividing the total coupon payments by the face value of the bond.
Yield to Maturity (YTM)
However, simply using coupon rates and face value is an incomplete calculation of total bond yield. It is because of the financial principle of the time value of money, according to which $100 today is more valuable than $100 in the future.
Investing a certain sum of money in a bond, the investor foregoes her liquidity (which is required for consumption) and returns from alternative investments that could’ve been made. $100 today can be equated to the present value of $100 tomorrow, which will be lesser.
Therefore, a bond’s yield to maturity is calculated. YTM is the interest rate at which the price of a bond equals the adjusted or present value of the cash flows expected to be generated in the future.
Relationship Between Bond Yields and Bond Prices
1. Nature of relationship
Bond yields and their prices share an inverse relationship. It means that when bond yields rise, bond prices fall, and vice versa. When bond yields rise due to falling interest rates, bond prices fall, and vice versa.
2. Factors affecting sensitivity
Factors, such as yield to maturity, coupon rate, and face value impact the relationship between the price and yield of the bond. A higher coupon rate gives a higher yield, while a higher face value gives a lower yield. The credit rating of the bond or the company issuing the bond also plays a part in determining the degree of sensitivity between the two.
3. Features of basis point value
A larger basis point value implies a bigger change in the price of the bond due to a given change in the yield of the bond. It affects the par value of the bond payable by the borrower to the lender at the time of maturity. Therefore, a higher basis point value represents a greater risk for the investor.
4. Calculation
The mathematical expression for the calculation of basis point value is as follows:
BPV = Yield x 0.0001
5. Graphical Illustration
More Resources
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FAQs
A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100 of a percent) or 0.0001 in decimal form. If interest rates rose from 2.00% to 2.50%, it would be said that rates rose 50 basis points.
How much is 50 basis points? ›
Since 1 Basis Point is equal to 0.01 %, 50 Basis point is equal to 0.5 percent. Therefore, 50 basis points denotes 0.5 percentage.
Is 100 basis points 1%? ›
How Much Is A Basis Point? A basis point is one-hundredth of a percentage point. For instance, one basis point equals 0.01%, or 0.0001. One hundred basis points is equal to 1%.
How to calculate basis point value? ›
One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. To convert basis points to a percentage, divide the basis points number by 100. To determine the number of basis points that a percent represents, multiply the percent by 100.
What does 300 basis points mean? ›
In this scenario, you should first multiply 300 by 0.0001 to get = 0.03. Remember, as discussed before, one basis point is equal to 0.01% or 0.0001. In the next step, you multiply the result by 100, which is equal to 3%. Therefore, 300 basis points mean a 3% percentage.
Is 1000 basis points 10%? ›
1 BP = 0.01% 10 BPS = 0.1% 100 BPS = 1% 1,000 BPS = 10%
Is 500 basis points 5 percent? ›
Conversely, to convert percentages into basis points, you must multiply the percentage by 100. So, if you want to convert 5% to basis points, multiplying by 100 will give you 500 basis points.
Why do people say basis points? ›
The term "basis point" has its origins in trading the "basis" or the spread between two interest rates. Since the basis is usually small, these are quoted multiplied up by 10,000, and hence a "full point" movement in the "basis" is a basis point.
What is a basis point for dummies? ›
Basis points (BPS) are used to indicate changes in interest rates of a financial instrument. Basis points are typically expressed with the abbreviations "bp," "bps," or "bips." One basis point is equal to 1/100th of 1%, or 0.01%. In decimal form, one basis point appears as 0.0001 (0.01/100).
Is 30 basis points 3 percent? ›
How to calculate basis points (bps) To calculate how many basis points a percentage figure is, multiply the percentage by 100: 0.30% x 100 = 30 basis points.
A dirty price is a bond pricing quote, which refers to the cost of a bond that includes accrued interest based on the coupon rate. Bond price quotes between coupon payment dates reflect the accrued interest up to the day of the quote. In short, a dirty bond price includes accrued interest while a clean price does not.
What is the difference between percentage points and basis points? ›
Description: Percentage point is used extensively in macro-economic indicators like inflation. One percentage point is also equal to 100 basis points.
What is 8 basis points equal to? ›
For example, 8 basis points would mean 0.08%. When describing interest rate changes, a change in 0.08% would represent an upward move of 8 basis points.
What is a prime rate today? ›
What Is the Current Prime Rate? As of May 20, 2024, the current prime rate is 8.50%, according to The Wall Street Journal's Money Rates table. This source aggregates the most common prime rates charged throughout the U.S. and in other countries. The federal funds rate is currently 5.25% to 5.50%.
What is 75 basis points fee? ›
Basis points are especially helpful for comparing rates between different securities. For example, a federal funds rate target of 0.25 percent is equal to a target of 25 basis points. Likewise, an annual fee of 75 basis points is the same as 0.75 percent of the portfolio's value.
What is a 0.01 interest rate? ›
If your savings account earns only a 0.01% annual interest rate, which is common with large banks, your earnings after a year would be $1. Put that $10,000 in a high-yield savings account that earns 5%, for the same amount of time, and you can earn more than $500.
What is the 50 basis point fee? ›
50 basis points is equivalent to 0.5%, as 1 basis point is one hundredth of 1%, or 0.01%. For example, if a stock option worth $60000 has increased by 50 basis points, its value has increased by $300, and is now worth $60300.
How much is 100 basis points? ›
A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%. “Basis point” is sometimes abbreviated to “bp” and “basis points” to “bps.”
How much is 60 basis points? ›
What is a basis point?
| Basis Points | Percentage | Decimal |
|---|
| 55 | 0.55% | 0.0055 |
| 60 | 0.60% | 0.0060 |
| 65 | 0.65% | 0.0065 |
| 70 | 0.70% | 0.0070 |
15 more rows40 basis points is the same as 0.4% or in decimal points form—0.004. This is because 1 basis point equals 0.01% or 1 basis point is equal to 1/100th of 1 percent.
