Basis Point
What Is a Basis Point?
A basis point (bps) is a unit of measurement used in finance to describe small percentage changes in interest rates, yields, or investment returns.
One basis point equals one-hundredth of one percent, or 0.01%.
Financial professionals often use basis points to express precise changes in financial rates.
Why It Matters
Basis points allow investors, analysts, and policymakers to communicate small changes in financial rates clearly and accurately.
They are widely used in discussions involving interest rates, bond yields, and investment fees.
How Basis Points Work
Because percentage changes can be confusing when expressed in decimal form, basis points simplify communication.
Examples:
- 1 basis point = 0.01%
- 25 basis points = 0.25%
- 100 basis points = 1%
If a bond yield increases from 4.00% to 4.25%, the yield increased by 25 basis points.
Example
A central bank raises interest rates by 50 basis points, increasing rates from 3.00% to 3.50%.
Basis Point vs Percentage Point
- A basis point equals 0.01%.
- A percentage point equals 1%.
For example, a move from 4% to 5% equals 100 basis points or 1 percentage point.
FAQs About Basis Points
Why do financial professionals use basis points?
They allow precise communication of small rate changes.
Are basis points used outside investing?
They are commonly used in lending, banking, and financial markets.
Do basis points apply only to interest rates?
No. They can describe changes in yields, returns, or fees.
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