I Know You Guys Will Like This.........

[FinanceDude]

Submitted by your friendly FA:

Remember that guy I told you I worked with who blew himself up? I guess his playbook is still being run...........

[url]http://news.yahoo.com/s/ap/20061205/ap_on_bi_co_ne/of_mutual_interest [/url]

 

[justin]

"Tjornehoj contends investors should be wary once expenses for an index fund climb above 60 basis points, or 0.06 percent".

Who said journalists aren't real good at math? (should be 0.6 percent)

 

[astromeria]

The problem is the term "basis points." Why don't we just say, "Avoid expense ratios over .6%"? Does "basis points" add anything of value to any such discussion? I always have to stop and think a moment when I run across the term. Jargon is often intended to obfuscate rather than clarify, or at least to divide the in-sters from the out-sters.

/editor rant off

 

[Martha]

I write loan documents where I use the basis point lingo because that is what the customer expects. I don't like it either, I rather just say x%.

 

[justin]

Actually in the context of expense ratios for mutual funds, I very rarely see them expressed in terms of basis points. Much more common is a percent (0.2%, 0.65%, etc). But like martha said, where it is an interest rate, basis points are very commonly mentioned (prime plus 150 basis points, LIBOR minus 25 basis points, etc.).

 

[FinanceDude]

Actually in the context of expense ratios for mutual funds, I very rarely see them expressed in terms of basis points. Much more common is a percent (0.2%, 0.65%, etc). But like martha said, where it is an interest rate, basis points are very commonly mentioned (prime plus 150 basis points, LIBOR minus 25 basis points, etc.).

Interest rates on things have been quoted in basis points for years.........I think financial folks have used basis points a lot to talk about spread yields.......i.e. 10-year Treasuries have a 100 basis points spread over 2 year CDs...........

 

[REWahoo]

Actually in the context of expense ratios for mutual funds, I very rarely see them expressed in terms of basis points. Much more common is a percent (0.2%, 0.65%, etc). But like martha said, where it is an interest rate, basis points are very commonly mentioned (prime plus 150 basis points, LIBOR minus 25 basis points, etc.).

Isn't one of the reasons for using basis points to make the intent of language clear in loan contracts and such? For example, if you didn't use basis points in a loan contract in which the stated interest rate was "prime plus 1%" and if prime was at 8.0%, would your interest rate be 9% or 8.08% (8% x 1.01)?

 

[FinanceDude]

Isn't one of the reasons for using basis points to make the intent of language clear in loan contracts and such? For example, if you didn't use basis points in a loan contract in which the stated interest rate was "prime plus 1%" and if prime was at 8.0%, would your interest rate be 9% or 8.08% (8% x 1.01)?

Sounds like a reasonable explanation to me.........

 

[astromeria]

Isn't one of the reasons for using basis points to make the intent of language clear in loan contracts and such? For example, if you didn't use basis points in a loan contract in which the stated interest rate was "prime plus 1%" and if prime was at 8.0%, would your interest rate be 9% or 8.08% (8% x 1.01)?

point <hee> taken...perhaps if it were expressed in terms of percents, like .6 basis points instead of 600. I've read the term about a gagillion times, but I still have to stop and translate a moment.

 

[Gumby]

No worse than using "mill rate" to talk about real property tax rates.

 

[bbuzzard]

Just out of morbid curiosity, can anyone point me to a very expensive index fund, say with an ER of over 1% or with a 12b-1? Do they exist?

 

[saluki9]

The problem is the term "basis points." Why don't we just say, "Avoid expense ratios over .6%"? Does "basis points" add anything of value to any such discussion? I always have to stop and think a moment when I run across the term. Jargon is often intended to obfuscate rather than clarify, or at least to divide the in-sters from the out-sters.

/editor rant off

The term has a lot of importance to those of us that work in the financial industry. Try talking to a trading desk and explaining .6 versus .06 etc over the phone.

 

[saluki9]

Just out of morbid curiosity, can anyone point me to a very expensive index fund, say with an ER of over 1% or with a 12b-1? Do they exist?

You bet. Morgan Stanley has an S&P 500 index fund with a 1.25% ER and many 401k plan participants have them in annuity contracts.

 

[astromeria]

Well, guys, my last company paid me $100k/year to know when it's OK to use software jargon (developer and sys admin docs) and when not to (end-user docs). Many times end users can't make use of documentation (when they actually bother to try-) because the writers/editors didn't get that little point.

This reminds me of a recent conversation about investing. My friend thought NAV was short for "navigation" as in "the value of this mutual fund navigated to this price yesterday" : 8)

 

[justin]

Well, guys, my last company paid me $100k/year to know when it's OK to use software jargon (developer and sys admin docs) and when not to (end-user docs).

Dang! I need a raise... I barely get paid half that and my company expects me to know when to use jargon (with fellow engineers) and when not to (the general public or non-technical clients).

 

[astromeria]

Silicon Valley wages...and I had to know one or two other things, too