A basis price is a price for a fixed income security that is expressed in terms of the overall yield anticipated, rather than in the form of the market value. Receiving quotes in the form of basis prices can be valuable for people making decisions about what to buy and sell, when the yield can become more important than the price. Information on pricing for upcoming security offerings can be found through financial publications, and personal finance advisors usually also have relevant information to assist people with the process of making purchasing decisions.
The basis price is equivalent to the yield to maturity. In either case, the term used assumes that the security will be held until it is mature, and a value estimation is made on the basis of how much it will yield. This can also be reliably used with fixed income securities that have guaranteed return rates. A bond, for example, can be quoted in terms of a basis price because it will have a fixed interest rate. Stocks, on the other hand, fluctuate too much to be able to generate a meaningful estimate of how much they will yield.
When a basis price is quoted, it is commonly seen in the form of a percentage, indicating the percentage that the bond will yield. Knowing the actual market price can be important as well when considering purchasing decisions. A bond with a high yield and a low cash price may yield less, for instance, than a more expensive bond with a lower basis price. The rate of return is weighed against other concerns, such as risks associated with the product to determine whether it is a good buy.
Basis prices do not include any tax liabilities that will be incurred by holding the security. Transaction costs, such as fees associated with the sale, are not calculated. It is important to keep in mind that the quotation is a gross value, and that people may net less once they actually buy and hold the product. Considerations, such as the direction the market is moving, also play a role when evaluating potential securities purchases.
Finance advisors usually recommend mixing investments, as diversity increases safety. Mixing products from different companies with varying basis prices will ensure a steady rate of return, and in the event that one financial instrument is devalued, it will not drag the entire portfolio down with it.
