Economics and similar, for the sleep-deprived
A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?
Update: seemingly not
Update: Oh yeah!
Friday, May 28, 2010
Basis points - an admonition
Quite why I am telling people things that any decent financial journalists' stylebook ought to have I don't know, but I have seen so much grievious abuse of the humble basis point over the last month or so ...
1) A basis point is a measure of differences between two interest rates (that's what a "basis" is; also futures and forward rates but those are basically the same thing). It is not merely a posh-sounding way of saying a hundredth of a per cent. Talking about unemployment rates, GDP growth or whatever in basis points doesn't make you look cool, it makes you look like you don't know what you are talking about (I once saw someone write that the rate of income tax was 4000 basis points. Puke.) There is a partial and occasional exception for inflation rates, as of course the inflation rate is the basis between an indexed gilt and an ordinary gilt, but usually it is not correct to talk about inflation in bp either.
2) A basis point is a measure of differences between interest rates. The current 3m dollar LIBOR is 0.54%, it's not 54bp.
3) Given that the basis point has been invented, use it. If one interest rate is 0.6% and another is 0.48%, the spread between them is 12bp. It is not "a 25% difference".
It's not difficult. The phrase "basis points" really just means "and now, since I am talking about interest rates, I am warning you that I propose to talk about adding and subtracting them rather than multiplying and compounding them, and also I am multiplying the quantities by 100 to make them easier to deal with". Bloomberg, Reuters, the FT and WSJ are all regular offenders with respect to this poor little unit.
this item posted by the management 5/28/2010 02:51:00 AM