A basis point (BPS) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%
. The term "basis point" originates from the base move between two percentages or the spread between two interest rates
. Basis points are typically used for calculating changes in interest rates, equity indices, and fixed-income security yields
. They are also used when referring to the cost of mutual funds and exchange- traded funds
. Basis points are often used to measure a difference in percentages and help prevent ambiguity and inaccuracy in financial discussions
. For example, if you're discussing an interest rate that is currently 5% and you say it's expected to increase 10% next month, using basis points can provide a more precise way to communicate the change
. Some key points about basis points include:
- One basis point is equal to 0.01%
- Basis points are used to show the change in the value or rate of a financial instrument
- They are commonly used in reference to interest rates and bond yields
- Basis points can also be used to describe movement in percentage terms of various other things, including the value of a stock
To convert basis points to percentages, divide basis points by 100
. For example, if a current interest rate is at 10% and it's expected to rise by 5%, someone could interpret that to mean that the new rate will be 10.5% (calculating 5% which is then added to the original rate)
