# Points in Finance: Definition, Uses, and Examples

Last updated 03/14/2024 by

Alessandra Nicole

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Summary:
Points in finance represent a versatile measurement in various financial contexts, indicating percentages, values, or fees. From bond prices to stock movements, and even mortgage interest rates, understanding points is vital for sound financial decision-making. This article delves into the multifaceted world of points, clarifying their meanings and applications in different financial instruments.

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## Understanding points

In finance, the term “point” always signifies a quantity of one, but its interpretation and utilization vary across different financial instruments. Points can represent percentages, values, or price changes.

### Points in bonds and debentures

In the realm of bonds and debentures, a single point equates to a 1% change in the face value of the investment. For instance, if a bond is sold at two points under par, it means it was sold at a 2% discount compared to its face value.

### Points in stocks and stock indexes

When it comes to stocks and stock indexes, movements are often expressed in points, where one point is equivalent to \$1. For example, if a stock opens a trading session at \$23 and closes the day at \$25, it’s said to have risen by two points.

### Points in futures contracts

In futures contracts, a point signifies a price change of one one-hundredth of one cent. It’s a minute unit of measurement used to track price fluctuations in commodities, currencies, and other assets.

### Points in mortgages and loans

Points in banking refer to the percentage difference between a loan’s interest rate and the prevailing prime interest rate. For instance, a credit card may offer an initial rate that converts to an interest rate of 12.99 points over the prime lending rate, meaning it’s 12.99% above the prime rate.
Additionally, in mortgages, a point can indicate the size of the loan origination fee charged by the lender. Each point represents 1% of the loan amount. For example, a \$200,000 mortgage with a three-point origination fee means a \$6,000 fee.
Weigh the risks and benefits
Here is a list of the benefits and drawbacks of using points in financial transactions.
##### Pros
• Effective way to measure and compare financial instruments.
• Allows for precise tracking of price movements in stocks and bonds.
• Enables borrowers to reduce their interest rates in mortgages through point buydowns.
##### Cons
• Can be confusing due to varying definitions in different financial contexts.
• Misunderstanding or miscalculation of points may lead to financial losses.
• Origination fees in mortgages can add to the overall cost of a loan.

### What is a basis point?

A basis point, often denoted as “bps,” is a unit of measurement used to describe very small changes in interest rates or financial indicators. One basis point is equal to one one-hundredth of a percentage point.

### How can I calculate points in a mortgage?

To calculate points in a mortgage, multiply the loan amount by the point value (e.g., 1 point equals 1% of the loan amount). This provides the origination fee. To calculate points regarding interest rates, it’s the percentage difference between the loan rate and the prime rate.

### Are points always expressed as percentages?

No, points can represent values, percentages, or price changes, depending on the financial context in which they are used.

## Key takeaways

• Points in finance are versatile, representing quantities of one in various ways.
• They can signify percentages in bonds, values in stocks, and small price changes in futures contracts.
• In mortgages, points indicate either loan origination fees or interest rate premiums over the prime rate.
• Understanding the specific meaning of points in different contexts is crucial for informed financial decision-making.

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