Point

Definition

Bonds

In the context of bonds, a “point” refers to a percentage change in the face value of the bond. Each point is equivalent to a 1% change. For instance, a bond with a $1,000 face value that moves by one point changes its value by $10. This usage helps investors understand variations in bond prices easily. See also [Basis Point].

Real Estate, Commercial Lending

Within real estate and commercial lending, a “point” is an upfront fee charged by the lender to increase their overall yield. It represents 1% of the loan’s total principal amount. For example, for a mortgage loan of $100,000, a charge of three points equates to $3,000.

Stocks

When dealing with stocks, a “point” signifies a $1 change in the market price of a stock. If a stock rises by five points, it appreciates by $5 per share. The term “point” is also used to describe movements in stock market indices like the Dow Jones Industrial Average, although these do not represent percentage changes but absolute dollar values.

Examples

1. Bonds:
   • A corporate bond with a face value of $1,000 increases by 2 points. The new value is $1,020.
2. Real Estate/Commercial Lending:
   • A homeowner takes a mortgage loan of $200,000, with a fee of 2 points. The total fee is $4,000.
3. Stocks:
   • A tech stock quoted at $150 rises by 3 points. The new market price is $153.

Frequently Asked Questions (FAQs)

1. How does a point differ between bonds and stocks?

• In bonds, one point represents a 1% change in the face value. In stocks, one point corresponds to a $1 change in the share price.

2. Why do lenders charge points in real estate loans?

• Lenders charge points to boost their overall yield on a loan. It acts as an upfront fee that compensates for the lower interest rates or other favorable loan terms, thereby spreading the lender’s revenue.

3. Can points in stock market indices be converted to percentage changes?

• Not directly. Points in stock market indices like the Dow Jones represent absolute changes in dollar value; they do not directly indicate percentage changes.

4. What does a movement of 10 points in the bond market signify?

• A 10-point change in the bond market signifies a 10% change in the bond’s face value. For a bond with a $1,000 face value, this would mean a shift of $100.

5. Are points tax-deductible in mortgage loans?

• Yes, mortgage points used for purchasing or improving a primary home are generally tax-deductible.

Related Terms

• Basis Point: A unit of measurement equal to 1/100th of 1% (0.01%), commonly used to denote changes in interest rates or bond yields.
• Yield: The income return on an investment, such as the interest or dividends received.
• Face Value: The nominal value or dollar value of a security stated by the issuer.
• Stock Market Indices: Statistical measures reflecting the composite value of selected stocks.

Online References

1. Investopedia: What Are Basis Points (BPS)?
2. NerdWallet: What’s the Deal With Mortgage Points?
3. SEC: Bonds - An Overview
4. Yahoo Finance: Understanding Stock Metrics

Suggested Books for Further Study

• “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
• “The Real Estate Investor’s Handbook” by Steven D. Fisher
• “The Little Book That Still Beats the Market” by Joel Greenblatt
• “Financial Markets and Institutions” by Frederic S. Mishkin and Stanley G. Eakins

Fundamentals of Financial Metrics: Finance Basics Quiz

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