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Basis points Print E-mail

Basis points  

What is it?

A basis point is a unit of measurement which is used in the financial world to describe percentage changes in rates or values of financial instruments. One hundred basis points are equal to one percentage point meaning that one basis point is equal to 0.01%. The term is generally used to talk about changes in interest rates or bond yields as the changes are often quite small.

Why is it in the news?

With movement in interest rates due to monetary policies set by central banks as well as changes in sovereign bonds held by governments, basis points are mentioned quite often in articles about these topics. People in finance also tend to talk about basis points rather than percentages and they are used when discussing how much banks have to pay to borrow money. The basis points are then used to determine the percentage of interest banks charge their customers.

How can I use it in class?

Start by asking students if they have heard the term. If not, read the definition to them and clarify their questions. Do some simple calculations with them to make sure they understand how the system works. Give them an example of a central bank raising the interest rates by 25 basis points. Ask them to then figure out how much the new interest rates would be if they started at 2.50%. (The calculation is: 25 basis points X 0.01% = .25 + 2.50 % which comes to 2.75%.)

Vocabulary

Ask students to find words in the article ‘German Bund Yield rise to One-Week High on Growth Signs’ which match the definitions below. The definitions are in the same order as the words in the article.

1 went up (Par 1)
2 shrank (Par 1)
3 a guess about the outcome of something (Par 2)
4 reduced by a large amount (Par 2)
5 money earned on bonds or securities (Par 2)
6 paid back a long time in the future (Par 3)
7 first (Par 5)
8 grew (Par 6)
9 speed (Par 6)
10 put together (Par 10)
11 quoted (Par 11)
12 the difference between the bid price (what the buyer will pay) and the ask price (the amount the seller would like) of a security (Par 11)

Follow-up questions

Discuss these questions in open class. Give reasons for your answers.

  • What reasons are there for government bonds to go up or down? What factors lie behind these changes?
  • How much influence do you think forecasts made by economics have on the markets?
  • What causes economies to expand or contract?
  • How does the public react in these two cases?

Where can I read about it?

German Bund Yields Rise to One-Week High on Growth Signs; Spain Bonds Drop, Bloomberg
Top Funds See Yields at One-Year Lows on Series of Rate Cuts: India Credit, Bloomberg
Sweden cuts its main interest rate on eurozone fears, BBC
Australia's economy expands 2.5%, led by mining, BBC 

Key

1 climbed, 2 contracted, 3 speculation, 4 pared, 5 yield(s), 6 long-dated, 7 initial, 8 expanded, 9 pace, 10 compiled, 11 cited, 12 spread

 
Bear market Print E-mail

Bear and bull

See bear market in the Cambridge Business English Dictionary

What is it?

A market condition in which the prices of securities are falling and widespread pessimism causes further falls in the market. As investors anticipate losses in a bear market, selling continues, which then creates further pessimism. Although figures can vary, a downturn of 20% or more in a share index, such as the Dow Jones or FTSE over at least a two-month period, is considered a sign that a bear market has begun.

Why is the term in the news?

In the US, commodities slumped as signs of slowing global growth sent an index of 24 raw materials into a bear market as crude oil, gold and silver tumbled and Asian markets have entered the worst bear market conditions in 35 years.

How can I use it in class?

Discussion

The term can be used to discuss a range of points with your students including the following:

  • Have your country's financial institutions entered a bear market?
  • Is there anything a government can do to reverse a bear market?
  • How can a bear market affect a nation's economy?
  • What is the opposite of a bear market? (A bull market)
 
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12.5%
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75%

Cambridge Business English Dictionary Online