GET TUTORING NEAR ME!

Basis points are a unit of measure used in finance to express the percentage change in the value or rate of a financial instrument. One basis point is equal to 1/100th of 1%, or 0.01%.

Basis points are often used to express the change in interest rates, yields on bonds, and other financial instruments. For example, if the interest rate on a mortgage goes from 3.50% to 3.75%, the increase can be expressed as a 25 basis point increase.

Basis points are also used to express the change in the price of a financial instrument. For example, if the price of a bond increases from $100 to $101, the increase can be expressed as a 100 basis point increase.

Basis points are a convenient way to express small changes in financial values or rates because they allow for more precise comparisons. For example, it would be difficult to compare the change in interest rates from 3.50% to 3.75% to the change in interest rates from 4.00% to 4.25%. However, expressing both changes as a 25 basis point increase makes the comparison much easier.

Here are five examples of how basis points can be used in finance:

1. Interest rates: If the Federal Reserve increases the federal funds rate by 25 basis points, it means that the rate has increased by 0.25%.
2. Yields on bonds: If the yield on a 10-year Treasury bond increases from 1.50% to 1.75%, the increase can be expressed as a 25 basis point increase.
3. Credit default swaps: If the price of a credit default swap on a particular company’s debt increases from $100 to $105, the increase can be expressed as a 500 basis point increase.
4. Foreign exchange rates: If the exchange rate for the euro to the U.S. dollar increases from 1.20 to 1.25, the increase can be expressed as a 50 basis point increase.
5. Stock index futures: If the price of a futures contract on the S&P 500 index increases from 3,000 to 3,050, the increase can be expressed as a 50 basis point increase.

Now, here is a quiz to test your knowledge of basis points:

1. What is a basis point?
2. How is a basis point different from a percentage point?
3. Can basis points be used to express the change in the value of a financial instrument?
4. Can basis points be used to express the change in the rate of a financial instrument?
5. Give an example of how basis points can be used to express the change in the yield on a bond.
6. Give an example of how basis points can be used to express the change in the price of a stock index future.
7. Give an example of how basis points can be used to express the change in the exchange rate for a foreign currency.
8. Give an example of how basis points can be used to express the change in the price of a credit default swap.
9. How can basis points be used to make comparisons between changes in financial values or rates more precise?
10. In what unit is the value of one basis point expressed?