What Is a Basis Point?

What Is a Basis Point?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Basis Point, often abbreviated as BPS, is a unit of measure used in finance to describe the change in value or rate of financial instruments. One basis point is equivalent to 0.01% or 0.0001 in decimal form. In other words, if a loan interest rate moves from 1.5% to 1.6%, that is a change of 10 basis points. It’s a useful tool for reducing confusion when talking about changes in rates and values, particularly when those changes are very small.

Related Questions

1. How are basis points used in finance?

Basis points are mostly used in finance to describe changes in interest rates, equity indexes, and the fixed income market. They offer a concrete way to express changes or differences in interest rates or other financial percentages.

2. How do basis points affect my loan?

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The impact of basis points on your loan is tied to your interest rate. For example, if your loan rate rises by 50 basis points, it means your rate has increased by 0.50%. This increase would raise your monthly loan payments.

3. Why are basis points useful?

Basis points are useful because they provide an easier way to describe small changes in interest rates, which can often be harder to understand when expressed in percentages. They assist in avoiding misinterpretation of these changes.

4. Do basis points apply to all financial areas?

While most commonly used in relation to interest rates, basis points can be used anywhere that it’s helpful to describe changes in rates or values. This can include things like investment returns, bond yields, or even credit card rates.

5. How are basis points calculated?

They’re calculated using straightforward math. If an interest rate increases by 1%, that equates to 100 basis points. Therefore, a 0.01% increase represents a single basis point. You basically multiply or divide by 100 to move between basis points and percentage points.