Basis Points

This blog will be very brief and covers the Vanguard Weekly Recap, a short section on Basis Points, and a quote.

Vanguard Weekly Recap

Good economic news arrived this week, but the nation remained on guard. Although it was announced on Monday that the Great Recession had officially ended more than a year ago, economic growth has been so sluggish that unemployment levels retained a recessionary feel. The Federal Reserve said it would maintain its current monetary policies as the economy continued to struggle. Problems still plagued the housing market, but existing-home sales and new construction both rose in August and new-home sales stayed about the same. The Conference Board's index of leading indicators was up, and the durable-goods report also brought welcome data. For the week, the S&P 500 Index rose 2.1% to 1,148 (for a year-to-date total return—including price change plus dividends—of about 4.5%). The yield of the 10-year U.S. Treasury note fell, 0.13%, 13 basis points to 2.62% (for a year-to-date decrease of 1.23%, 123 basis points).

Basis Points

When dealing with fixed income securities like bonds, the term basis points is constantly stated. Someone a long time ago figured out that when an interest rate changes by a certain percentage that people might get confused. Let me demonstrate, if the interest rate was to change from 4% to 5% it would move 1% (5-4) but on a relative term it moved 20% ((5-4)/4).

So which is correct, it depends on you you look at it. It is clear that having only one answer is important to an investor. The term basis point denotes the change in interest rates, in this example, from 4% to 5%. A 100 basis point is equal 1% so this is a 100 basis point move. The absolute value of the movement, in this example 20% will be stated as a percentage.

Quote

“It is not enough to have knowledge – one must use it as well.” Descartes