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Basis Point

A Basis Point is a financial term used to indicate 1 one-hundredth of a one percent change in an interest rate that is tied to a financial instrument such as a bond, mortgage, or other fixed-income investments. A Basis Point is a much more accurate way to denote a change in the interest rate that is less than one percent of the instruments mentioned above. To determine the amount of loss or gain of an interest change using the Basis Point method, you multiply the dollar amount by the change in Basis Points. With a $100,000 investment and a change of one Basis Point, you would multiply $100,000 x 0.01% or (.0001) to yield a change of $10. That amount is then added to the $100,000 if the Basis Point went up – or subtracted from the $100,000 if it has gone down. A change of 50 basis points would increase a 5.15% investment to 5.65% or decrease it to 4.65% with a corresponding dollar amount of $500. Converting a percentage change to Basis Points is as follows–a 1% change is equal to 100 Basis Points and a 0.01% change is equal to one Basis Point.

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