Basis point
A hundredth of a percentage point. A rate moving from 4.00% to 4.25% has moved 25 of them.
Where you will meet it
Basis point appears in 12 learning outcomes on the CFA syllabus. A few of them:
- Tell apart Macaulay duration, modified duration and money duration
“The price value of a basis point is money duration scaled to a single basis point, and it is what a trader hedges with.”
- Work out the swap spread at a given maturity and explain what it means
“With a five-year swap rate of 3.55% and a five-year government yield of 3.15%, the spread is 40 basis points.”
- Explain how credit spreads, and returns on credit-sensitive fixed-income securities, shift as the business cycle moves through its stages
“Lower-rated issuers are the most sensitive, so high-yield spreads widen by far more in basis points than investment-grade spreads, and credit-sensitive bonds underperform government bonds of similar duration in downturns but outperform in recoveries.”
- Contrast approaches to one liability with approaches to a schedule of liabilities, and the different ways each can be implemented
“Duration matching needs asset present value at least equal to liability present value, equal money duration (basis point value), and asset convexity above liability convexity but no higher than necessary.”
Practise it
Practise basis point until it is automatic: questions that explain every wrong option.
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