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Finance: What Is a Basis Point? 124 Views

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Description:

What is a basis point? Basis points are how changes in financial securities are described. “The stock dropped 100 points” actually means that the stock price decreased by 1%. One basis point corresponds with 1/100th of 1%; as the point system has to describe changes, it makes sense that this figure would be so small, because changes are typically not that drastic, but need to be described. For example, saying a stock price changed .01% is a little confusing to grasp, but 100 points is not, assuming the lingo is understood.

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00:00
finance a la shmoop what is a basis point?
00:05
well one percentage point is a hundred basis points, half a percentage is 50
00:12
basis points, five percentage points is? yeah we're gonna make you do that one on [frowning man talks to camera]
00:17
your own. well the basic idea is that in very large financial transactions those
00:22
involved need highly granular computation grids, and basis points

00:27
divid interest rates much more tightly. if a company borrows three billion
00:31
dollars just noting that the rate is four percent is really vague. it would
00:37
need to be noted as four point zero zero percent. why? because just one basis point [equation on screen]
00:44
i.e. one hundredth of a percent per year on three billion dollars borrowed
00:49
is still a lot of money. that is one basis point on three billion bucks is
00:53
300 grand .so basis points are a real thing in high finance transactions and [smiling man talk to camera]
00:58
okay okay the answer is 500 basis points. yeah all right now you can go back to
01:03
spinning this thingy. [man spins fidget spinner]
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