DEFINITION of 'Beep'
"Beep" is financial industry jargon for basis point, which is 1/100 of a percentage point in the context of interest rates, bond yields and other debt instruments. The term came into popular usage as an easier way of referring to the basis points as bps. Because basis points express percentages of change, not dollars, they have limited use in quoting stock prices.
BREAKING DOWN 'Beep'
Beeps are used when discussing debt instruments because the loans can change in small segments. Bonds and loans come with stated interest rates that may change by 10 or 50 beeps. This affects the bonds' true yields and the loans’ true costs.
When converting beeps to percentages, multiply the number of beeps by 0.0001. For example, an investor is following a bond with a price increase of 225 beeps. Because the investor wants to know the percentage of change, he multiplies the 225 beeps by 0.0001 and discovers 0.0225, or 2.25%, is the amount of the price increase.
Importance of Beeps
Beeps are an effective method for adding or subtracting percentages when measuring change. For example, interest rates move from 3.56% to 5.66%. It's easier to determine the difference by subtracting 356 beeps from 566 beeps than subtracting 3.56 from 5.66.
Small percentages affect loans' fees or charges. For example, in credit card processing, beeps refer to a processor's markup on an interchange plus pricing model. Retailers accepting credit card payments calculate the amount of money they pay in fees for a given number of beeps yielded over a set sales volume. For example, a business processes $20,000 per month in credit card sales volume. A processor’s rate is 25 basis points over interchange fees. The business owner converts the beeps to a decimal by dividing the number of beeps by 10,000 (25 / 10,000 = 0.0025). The owner then multiplies the decimal by the dollar volume (0.0025 * $20,000 = 50). The processor’s fee yields a charge of $50 over $20,000.
Beeps expressing the difference between two interest rates show the spread between the rates. For example, the spread between a 1.5% rate and a 1% rate has a yield of 50 beeps. Bonds and loans are often compared with underlying indices when showing the difference between the financial instrument and the prevailing rate. For example, a bond yielding 6% compared to an underlying bond index showing an average bond rate of 4.5% is 150 beeps above the index rate.