What is the value of the basic points?
The value of the basic point is to measure the effects of changes in revenues on the value of financial instruments. On the bond market, it is used to calculate the effect that a low change in interest rates to a particular bond should. The value of the bonds at the basic point is important because it allows investors to measure the interest risk at which they are issued by purchasing a particular bond. They are used in discussions about percentage and 1 base point is 1/100 percentage point. Instead of a percentage, investors use basic points because the percentages can be misleading. For example, an interest rate increase of 1 percent may mean that the interest rate increased from 2 to 3 percent, or it could mean that it itself increased by 1 percent from 2 percent to 2.02 percent.
The term "basic point" is commonly used in connection with the activities of the Federal Reserve. For example, if the Fed decides to increase the interest rate from 2.00 percent to 2.25 percent, the financial report announces that the Fed has increased interest rates by 25 BasicCh points. The basic points also describe the relationship between the rate and its scale; For example, the rate could be set to a certain number of basic points above the benchmark, so it moves with its basic speed, but maintains the same distance from it. The term is also used for discussion on percent of percent on other financial markets, such as bond yield changes.
The bond yield is the expected discount rate revealed by the market price of the bond and its payment current. The bond payment flow is outlined in the bond contract, so that it does not change due to market conditions. However, the yield may change as a result of price changes. The yield is calculated by the price and, if the bond is increasing, then its yield is lower than before the price change.
Inverse relationship between the bond price and yield means that the increase in the yield reduces the value of the binding; The value of the basic points tells investors about the size of this effect. The value of the basic points is detected by calculating the revenue of the binding, adding 1 basic point andBy connecting this number back to the same formula to obtain the price that the bond should have if the yield is 1 basic point higher. The difference between this price and the market price of the bond is the basic value of the bond. This image is easy to calculate, but it is also easy to make errors in often making calculations with complex binding structures. That is why financial institutions constantly calculate basic points using financial software on computers.