A value equaling one one-hundredth of a percent ( 0.01%). Basis point is used to measure yield differences among bonds and other types of debt. For example, there is a 30 basis-point difference between two bonds if one yields 5.3% and the other yields 5.6%.
of a percentage point (1/100 of 1%). One percentage point equals 100 basis
points. This term is commonly used in a trading context for futures contracts
or when talking about price movements of bonds and loans. Also used in the
context of the Federal Reserve moving the federal funds rate or the discount
rate by 25 or 50 basis points.
A value equaling one one-hundredth of a percent ( 1/100 of 1%). Basis point is used to measure yield differences among bonds. For example, there is a 30 basis point difference between two bonds if one yields 10.3% and the other yields 10.6%.
Case Study On May 9, 2001, WorldCom, Inc., issued $11.9 billion of bonds in what at the time was the largest corporate debt issue in U.S. history. WorldCom's bond issue exceeded by $3.3 billion the previous largest issue, by Ford Motor Company two years earlier. Most of the proceeds from the WorldCom bond issue were to be used to pay down short-term debt, including $6 billion of commercial paper. The entire issue, which included maturities of 3 years, 10 years, and 30 years, was sold at an average interest cost of 7.6%. The 3-year bonds were sold to yield 6.566%, while the 10-year and 30-year bonds sold to yield 7.659% and 8.250%, respectively. The 30-year portion, maturing in May 2031, sold at a premium of 259 basis points, or 2.59 percentage points, above the 30-year Treasury yield of 5.66%. The 259 basis-point premium to long-term Treasuries indicated the substantial credit risk assumed by investors who purchased WorldCom bonds. The WorldCom issue took place during a painful period for telecom companies, and the firm's common stock price had declined by over 60% in the year prior to the debt issue. Intense competition caused the company's long distance operation to become a particular problem. The bonds were rated BBB+ by Standard & Poor's and A-3 by Moody's. Although the issue was a success, the firm's financial position continued to deteriorate, and a little more than a year later WorldCom was bankrupt.