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Basis Point

A basis point (bps) is 0.01 percentage point and equals $1,000 annually on a contract protecting $10 million of debt for five year. Basis points are largely used to measure changes in interest rates, risk premiums, liquidity premiums, yields, stock indexes, etc. For example, if a country risk premium rose from 500 to 1000, the cost of equity for a company operating in that country would have to go up by 5% (or 500 bps). Similarly, if a bond yield increased from 4% to 4.35%, the yield is said to have risen by 35 basis points.

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