Basis point

A basis point (bps) is a unit of measurement used in finance to describe the percentage change in interest rates, yields, or other financial percentages. One basis point is equal to 0.01%, or one hundredth of a percent.
Updated: May 31, 2024

3 key takeaways

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  • One basis point equals 0.01%, or 0.0001 in decimal form.
  • Basis points are commonly used to describe changes in interest rates, bond yields, and other financial metrics.
  • Using basis points provides clarity and precision, especially when dealing with small percentage changes.

What is a basis point?

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A basis point is a standard unit of measure used in finance to describe small changes in interest rates, bond yields, and other financial percentages. The term “basis point” is often used to avoid confusion when discussing changes in rates or percentages. For example, saying an interest rate increased by 0.50% can be unclear, whereas saying it increased by 50 basis points is precise.

How to convert basis points

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  • To percentage: To convert basis points to a percentage, divide the number of basis points by 100. For example, 50 basis points is 50/100 = 0.50%.
  • To basis points: To convert a percentage to basis points, multiply the percentage by 100. For example, 0.75% is 0.75 * 100 = 75 basis points.

Examples of basis point usage

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1. Interest rates

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  • Central bank rate change: If a central bank raises its policy interest rate from 2.00% to 2.25%, the rate has increased by 25 basis points.
  • Mortgage rate: A mortgage lender may offer a rate of 3.75%, and if the rate decreases to 3.50%, it has fallen by 25 basis points.

2. Bond yields

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  • Government bonds: If the yield on a 10-year government bond rises from 1.50% to 1.75%, the yield has increased by 25 basis points.
  • Corporate bonds: An investor observes that the yield on a corporate bond has changed from 4.20% to 4.50%, indicating an increase of 30 basis points.

3. Financial metrics

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  • Expense ratios: A mutual fund reduces its expense ratio from 1.25% to 1.15%, resulting in a decrease of 10 basis points.
  • Stock returns: An analyst notes that a stock’s return has improved by 15 basis points over the previous quarter.

Importance of basis points

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  • Clarity: Using basis points provides clear and precise communication, especially when discussing small changes in percentages.
  • Standardization: Basis points offer a standardized way to express changes in interest rates and financial metrics, reducing the likelihood of misunderstandings.
  • Detailed analysis: Financial professionals use basis points to conduct detailed analysis and make informed decisions based on small percentage changes.

Sources & references
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