# What's the difference between 'point' and 'percent'?

LainyAugust 9, 2003

I've got a basic grounding in investment terminology but this one recently threw me. And since the person who used it was trying to sell something, I hesitated to ask them for a clarification. I'm confused between the usage of 'point' and 'percent' in this situation:

I currently have some money in a "high (ha!) yield" savings account which is currently paying - because it is a variable rate and changes on the 1st of each month - interest at 1.14%. Not sure if this is APR or actual yield.

My bank's investment person called to say that if I wanted to earn a "better" rate of interest, I should consider putting some or all of the money into 7-day floating notes. I asked what the rate was on these notes and was told that "it is nine-tenths of a point."

What I am unclear about is whether "9/10 of a point" is the same as 0.9%. If so, why not just say "point-nine percent"?

Now I do know that while the 1.14% interest is subject to tax, supposedly the interest received on the floating notes is completely tax free. So if it is indeed 0.9%, I would have to somehow calculate whether or not that 1/4-percent difference in money actually received would actually come out to more money in my pocket versus my net after having to pay taxes on it when I file my return (or more correctly, estimated tax payments).

But it would be a good starting point to know whether we are talking apples and apples (both percents) or apples and oranges (one a percent and a 'point' being something else). So what the heck IS a "point" anyway, when talking about interest rates??

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gina_in_fl

as far as i know a point is part of a per-cent. interchangeable.

August 10, 2003 at 4:02AM
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dave_donhoff

The term "point" is an abbreviation of "percentage point."

100 points = 100%

NOW, a "basis point" is 1/100 of 1% (or 1 point.)

So, 50 basis points is 1/2 of 1 percentage point.

Basis points are also known as bp's, or "bips."

Dave Donhoff
Just some mortgage guy ;~)

August 10, 2003 at 3:54PM
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Lainy

Thanks guys! So as I suspected, the investment person's "nine-tenths of a point" is indeed the same as "point-nine percent." I am assuming that when talking about plain ol' points (rather than basis points) this is indeed what was meant.

So then, figuring it very simplistically, the choice between getting 1.14% (I did find out that is actual yield, not APR) of taxable interest income versus 0.9% of tax-free interest income, in a 25% tax bracket, should be pretty much a no-brainer. The difference between the two figures is 0.24 percent. Using \$10,000 as a hypothetical figure, 1.14% would give me \$114 of taxable income, but subtracting 25% from that would net me \$85.50. By going for the 0.9% tax-free option instead, I would end up with \$90. Not MUCH more, but still MORE.

Now if I end up edging into the 28% bracket, the tax-free rate looks even better (\$82.08 net versus \$90.00)...and so on.

But if I were in a 15% bracket, the advantage would disappear (\$96.89 net after taxes, versus \$90 from tax-free interest).

I know this probably isn't precisely the 'right' way to figure it... because there are fixed income taxes assessed on taxable income before the percentages kick in... but the principle is hopefully fairly sound... er, Dave?

August 11, 2003 at 12:27AM
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joyfulguy

Don't know the U.S. system ...

... but won't the type of return that you'd be getting on the floating notes be interest?

So wouldn't it be taxable, same as the interest that you're earning now on the bank account?

Maybe you should lend it out in chunks up to \$500. in short-term loans to carry people over till payday.

I've received scores of such offers in my e-mail. Haven't asked how much they charge.

But someone told me the other day that I can make such loans at those cheque-cashing places - and that they charge something like 25% per month (or part of). Don't know about that.

You might need some big tough guy with a baseball bat as an enforcer.

Good wishes for success in your search for the ideal investment.

joyful

August 11, 2003 at 7:16AM
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Lainy

From what the investment person has said so far, the interest on these floating notes is tax-free because they are government issued. Just as when you invest in municipal bonds, the interest received on those is tax-free also. Some investments are tax DEFERRED rather than truly tax-free, meaning that you don't pay tax on the interest during the year(s) in which the interest is actually credited to your account but you will have to do so when the investment (bond, annuity, whatever) finally reaches maturity and you get your principal plus interest back.

I see you are located in Canada. Interesting thing is, when I inherited some money from my dad, back in the mid 1990s, it was the first chance I had to buy any stocks and after doing a lot of research I decided to put about 2/3 of it into various Canadian companies. Canadian Pacific, Canadian National Railway, Halliburton Company, and a couple of others. Turns out that those are the only ones who have really held their own in the recent years' stock market mess. Well.... except for Nortel (used to be Northern Telecom before they started aggressively expanding into the USA). I bought it at something like \$17 a share. The stock split several times and just kept going up again. At one point in the 1990s it was up to \$120 CDN per share. I agonized for weeks over whether to sell it all at that point and get hit with capital gains taxes on the profit, or to just follow my usual instinct and let it keep doing its rise-split-rise-split thing. Finally opted to hold onto it. Then the telecom bubble burst and within two weeks the stock price went into freefall. It was selling for \$2.98 a share the last time I looked. Now there's your basic "oops". Oh well, if I ever desperately need to take a whopping capital loss, I can always sell it.....

Funny story: I love Tim Hortons coffee and one day I decided to find out if I could buy stock in the company. They are starting to expand into the most northern parts of the USA now too (Buffalo, Rochester, Syracuse, and such). [Too bad there is so much competition here already from Dunkin' Donuts and Starbucks] Anyway, I found out that Tim Hortons is owned by Wendys (which is all over the place down here). So I bought 100 shares of Wendys. Now if only I could buy Tim's coffee at Wendys...!!!!

August 11, 2003 at 9:33AM
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dave_donhoff

I know this probably isn't precisely the 'right' way to figure it... because there are fixed income taxes assessed on taxable income before the percentages kick in... but the principle is hopefully fairly sound... er, Dave?

Well... taxes is a whole 'nuther ball of waxes! I know enough about them to know I'm better off getting help from those who eat them & love them.

That's what I recommend for you as well...

Cheers,
Dave Donhoff
Just some mortgage guy ;~)

August 11, 2003 at 11:20AM
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