6

S&P's schedule of costs mention that getting a rating from them currently costs "6.25 basis points" of the offering.

Does this literally mean 6.25%? As in if the bond produced was 100 million in size, the issuing company (or whoever was paying for the rating) would have to pay 6.25 million?

  • 2
    "Basis point: one hundredth of one percent", so 6.25 basis points on 100 million would be $62,500. – ChrisInEdmonton Apr 16 '16 at 17:41
  • "I was considering issuing a bunch of debt backed by nothing so therefore it is related to personal finance." Huh???? – Nate Eldredge Apr 16 '16 at 17:49
  • 1
    Nate - I'm just guessing that was a bit of a joke. Aside from that "what is a basis point" is a valid question if we haven't answered it yet. – JTP - Apologise to Monica Apr 16 '16 at 19:18
  • @JoeTaxpayer. If that the reason to keep it (and I agree that's a valid question), it might be a good idea to change the title line...? – keshlam Apr 16 '16 at 21:13
  • @keshlam - good idea, sir. Done. – JTP - Apologise to Monica Apr 16 '16 at 21:56
9

According to the Investopedia:

One basis point is equal to 1/100th of 1%, or 0.01% (0.0001)

Thus, if S&P charges 6.25 basis points to rate a bond and the bond is $100 million, this will cost you $62,500.

(I'm not sure you can actually issue a bond as a not-super-wealthy individual, but I suppose there's nothing stopping you from trying)

| improve this answer | |
3

FYI, the term exists to solve the following language problem when discussing percentages:

Alice: I got a loan at 5% APR. But if I ever miss a payment the rate goes up 2%.

Bob: That's it? 5.1% doesn't seem all that bad.

Alice: No, it goes up to 7%.

Bob: Oh, you mean it goes up 40%.

Alice: ACK!

Because percent can be a unit just like meter or orange, a term is needed to distinguish when you're talking about the unit called percent vs. the mathematical operation called percent, especially when you need to use them in the same sentence. So basis point means 1/100 of the unit called percent (the same way centimeter means 1/100 of the unit called meter). Alice and Bob can then avoid confusion by using only one meaning of the word "percent" at a time:

Alice: I got a loan at 5% APR. But if I ever miss a payment the rate goes up by 200 basis points.

Bob: Yikes, to 7%!

Alice: Yep.

or:

Alice: I got a loan at 500 basis points APR. But if I ever miss a payment the rate goes up by 40%.

Bob: Yikes, to 700 basis points!

Alice: Yep.

| improve this answer | |
  • thanks! this helps with the terminology I hear colloquially – CQM Apr 19 '16 at 22:04

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.