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What is a Basis Point?

When percentages being used to describe a security are very small, basis points are often used to describe the numbers.

A Basis Point (bp) is 1/100th of a percent, so 1% = 100 bps.

This metric is used when discussing financial instruments for which very small changes in percentages can make a difference.

For example, rates on single premium immediate annuities change weekly, and generally only by a few basis points. These small changes can make a difference competitively week-to-week, because a few basis points can translate to thousands of dollars of income over time. Other places where basis points are used include: advisory and management fees, moves in indexes and securities, bonds, and so on.

When interest rates and yields change, basis points are used in the Price Value of a Basis Point (PVBP) and other calculations to measure the effects of such movement on bond prices.

Keywords: annuities, bonds, basis point, fixed-income securities,