Chartered Market Technician (CMT) Practice Exam

Basis points are a common unit of measurement used in finance to describe changes in interest rates, bond yields, or other percentages. One basis point is equal to one-hundredth of a percentage point, which means that if an interest rate increases by one basis point, it has gone up by 0.01%. This unit is especially useful in financial contexts because it allows for precise communication about small changes in percentages, which can be significant in terms of financial transactions and investments. For example, a change from 3.00% to 3.01% (a 1 basis point increase) may seem small, but in terms of large sums of money, it can have substantial implications. Understanding basis points is essential for professionals in finance because it helps in accurately interpreting changes in funding costs, returns on investments, or pricing of securities. Thus, recognizing that a basis point is indeed a measurement of hundredths of a percentage point is crucial for effective financial analysis and communication.