Basis points are used in the securities industry in many ways, including:
- To express changes in bond yields: If the yield on a bond increases from .75% to .85%, a practitioner might say that the yield moved by 10 bps, rather than saying “point-ten-percent” (0.001%).
- To calculate underwriting fees: Underwriting fees for a bond issuance might be calculated as a set number of basis points off the face value of the issue. For example, if an issuer sold $125 million in bonds, and the underwriting fees were 75 basis points, the fees to the bank would be calculated as (0.0075) x ($125,000,000) = $937,500.
- To describe actions by the Federal Reserve: Basis points may be used when discussing actions by the Federal Open Market Committee (FOMC) in connection with adjustments to the nation’s monetary policy. For example, if the fed increases its target fed funds rate from .25% to .50%, economists could state that the fed increased rates by 25 bps.
Basis points requires that candidates be precise and accurate with decimal points. When in doubt, recall that 100 bps = 1%, which is input as 0.0100 on your calculator. If the question calls for the use of less than 100 basis points, then you are using less than 1%; don’t make the mistake of inputting 75 basis points as 0.075 – this is 7.5%. 75 basis points is properly input into a four function calculator as 0.0075, which is less than 1%.
Series 7, Series 24, Series 65, Series 66, Series 79, Series 86, Series 87