| | Apparently I get props only when I talk about the stock market. Not even a picture from the Miss USA Connecticut pageant can get me a prop. It's sad... because Miss USA Connecticut deserves props. Alright, so here it goes with the stock market again... I dedicate this entry to Miss Connecticut.
There are various types of interest rates in the world of finances - interest rates for your credit card, interest rates for mortgages, interest rates when banks borrow money from each other, interest rates when banks borrow money from the Federal government, etc. These interest rates have a percentage rate, such as 12.99%, which may be a typical credit card interest rate.
When the market needs a little boost, such as it does now, the U.S. government may cut the interest rate it charges for the banks to borrow money from them. The U.S. government may also raise the interest rate if it believes the U.S. dollar's inflation rate is too high.
When the U.S. government changes its interest rate, the media uses the terms "percentage points" and "basis points" to describe the change in the interest rate. For example, if the Federal government changes its interest rate from 1.5% to 1.25%, it is said that the "Feds have cut their interest rate by 0.25 percentage point." You can't say that the Feds have cut their interest rate by 0.25 percent, because a change of 0.25 percent is equivalent to 1.5% * 25% = 1.5% * 0.25 = 0.375%, not 0.25%. To make the distinction clear, the term "percentage point", not "percentage", is used.
The media also uses the term "basis point" or "bp". This term is used more as a convenience. Since the Federal government raises or cuts inerest rate by a percentage point usually less than 1 percentage point, it is cumbersome to talk about "zero-point-whatever percentage point" all the time. As a shortcut, the media will use the term "basis point", which is equivalent to 100th of a percent, or as I like to say "percent of a percent."
So, for example, if the Feds change the interest rate from 1.5% to 1.25%, the media can say either that "the Feds have cut the interest rate by 0.25 percentage point", or that "the Feds have cut the interest rate by 25 basis points." The two are equivalent, and the media will use the two terms interchangeably as long as the numbers in front of the term are adjusted accordingly.
Basis point has a symbol that kind of looks like a percent sign but with two small zeros after it. It kind of looks like this: %00. Not that you'd ever see that symbol because the media never uses it, but I thought you'd like to know. But the term "basis point" is used all the time so you should know it if you ever watch or read the finance news.
|
| | Posted 10/26/2008 10:45 PM - 30 Views - 4 eProps - 3 comments
- recommend
  - recs0
- share
- email
 - sent0
|
