What is a Basis Point ?

A basis point is quite simply 0.01 of 1% So if an interest rate is 5.00% and it increases to 5.01%, that corresponds to 1 basis point increase. What is it used for ? Profit margins for fixed income products are measured in basis points.

Lets look at an example in Excel:

In this example, we have a 1 year loan of 100,000,000. The bank can borrow money at 5.00% and loans the money at 5.01% The profit on this trade is 10,000.

Download Spreadsheet to look at how a basis point can be represented in Excel

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