Basis Point
One hundredth of one percentage point (0.01%) — the standard unit for quoting changes in interest rates, yields, and credit spreads.
Formula
1 bp = 0.01% = 0.0001 | DV01 = Modified Duration × Bond Price × 0.0001
A basis point (bp or bps) is 0.01%, or 1/100th of a percentage point. It is the standard unit of measurement in fixed income and rate markets, used to avoid ambiguity when quoting small rate changes.
When the Fed raises rates by "25 basis points," it means 0.25 percentage points — from, say, 5.25% to 5.50%. A credit spread widening by "50 basis points" means it moved from, say, 1.50% to 2.00% above Treasuries.
For duration math: a 1 basis point yield change is used to compute DV01 (dollar value of a 1bp move) — the actual dollar P&L for a $1 basis point change in yield on a given position.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerConsumer Price Index (CPI)
Tracks changes in the price of a fixed basket of consumer goods and services — the most closely watched inflation gauge.
BeginnerCredit Spread
The yield difference between a corporate (or other non-government) bond and a Treasury of the same maturity — the market's price for credit risk.
IntermediateDuration
A measure of a bond's sensitivity to interest rate changes — the approximate percentage price change for a 1% move in yield.
AdvancedFederal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediateNominal Yield
A bond's stated yield without adjusting for inflation — the face-value return before accounting for the erosion of purchasing power.
IntermediatePrice-Yield Inverse Relationship
The fundamental bond market law: when yields rise, bond prices fall; when yields fall, bond prices rise — always and mechanically.
Beginner