Smart Bond Investing

Bond Basics


Basis Point Basics

You often hear the term basis points—bps for short—in connection with bonds and interest rates. A basis point is one one-hundredth of a percentage point (.01). One percent = 100 basis points. One half of 1 percent = 50 basis points. Bond traders and brokers regularly use basis points to state concise differences in bond yields. The Federal Reserve Board likes to use bps when referring to changes in the federal funds rate.

Pop Quiz

Question: The Federal Reserve Open Market Committee announced it would raise the discount rate by 25 basis points. How much did the Fed raise interest rates?

A. 2.5 percent
B. One-quarter of a percent
C. 25 percent

Check Your Answer

Where to Find Economic Indicators

Smart bond investors pay close attention to key or "leading" economic indicators, primarily watching for any potential impact they may have on inflation and, because there is a close correlation, interest rates. Various branches of the federal government keep tabs on many, but not all, of these leading indicators. Here are a few useful online resources:

U.S. Census Bureau's Economic Briefing Room and Economic Calendar

U.S. Department of Labor, Bureau of Labor Statistics

The Conference Board's Economic Indicators

The Federal Reserve Board's calendar of Federal Open Market Committee (FOMC) meetings. The FOMC sets certain interest rates that are used by others in the bond market to determine all other interest rates.

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