Basis Point: A Key Financial Metric Explained
Definition & Meaning
A basis point is a unit of measurement used in finance to describe changes in interest rates or other percentages. Specifically, one basis point equals one hundredth of a percentage point, or 0.01%. This term is particularly useful in the context of fixed income securities, such as bonds, where yields can fluctuate slightly within a narrow range. By using basis points, financial professionals can clearly communicate small changes in rates without confusion over absolute versus relative terms. For instance, if an interest rate increases from 12.83 percent to 12.88 percent, this change is expressed as a difference of 5 basis points.
Legal Use & context
Basis points are commonly utilized in various legal and financial contexts, particularly in areas involving contracts, loans, and securities. Understanding basis points is essential for legal professionals working in finance, banking, or investment sectors. They may encounter basis points in:
- Loan agreements
- Investment contracts
- Bonds and securities transactions
Users can manage certain financial documents using templates available on platforms like US Legal Forms, which are drafted by qualified attorneys.
Real-world examples
Here are a couple of examples of abatement:
Here are a couple of examples illustrating the use of basis points:
- If a bank raises its mortgage rate from 3.50 percent to 3.75 percent, this increase is 25 basis points.
- If a bond's yield drops from 5.00 percent to 4.75 percent, it has decreased by 25 basis points. (hypothetical example)