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%.)
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)
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
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