Basis Point
A basis point (bp) is one-hundredth of one percent (0.01%), commonly used to express changes in interest rates, bond yields, and fees. 100 basis points equals 1%.
Exam Tip
1 basis point = 0.01%. 100 bps = 1%. "Fed raised by 25 bps" = 0.25% increase. Know the conversions!
What is a Basis Point?
A basis point (often abbreviated as "bp" or "bps" and pronounced "bips") is a unit of measure equal to 1/100th of 1 percent (0.01%). Basis points are used in finance to describe small changes in interest rates, bond yields, and investment fees.
Basis Point Conversions
| Basis Points | Percentage | Decimal |
|---|---|---|
| 1 bp | 0.01% | 0.0001 |
| 10 bps | 0.10% | 0.0010 |
| 25 bps | 0.25% | 0.0025 |
| 50 bps | 0.50% | 0.0050 |
| 100 bps | 1.00% | 0.0100 |
| 200 bps | 2.00% | 0.0200 |
Why Use Basis Points?
Basis points eliminate ambiguity when discussing rate changes:
Confusing: "The rate increased by 1%"
- Does that mean from 5% to 6%? (1 percentage point)
- Or from 5% to 5.05%? (1% of 5%)
Clear: "The rate increased by 100 basis points"
- Always means from 5% to 6%
Common Uses
| Application | Example |
|---|---|
| Fed Rate Changes | "The Fed raised rates by 25 basis points" |
| Bond Yields | "10-year Treasury up 5 bps to 4.25%" |
| Expense Ratios | "Fund charges 75 bps annually" |
| Loan Spreads | "Mortgage rate is SOFR + 250 bps" |
| Credit Spreads | "Corporate bond spread widened 15 bps" |
Calculating Basis Points
To convert percentage to basis points: Percentage × 100 = Basis Points
Example: 0.25% = 0.25 × 100 = 25 bps
To convert basis points to percentage: Basis Points ÷ 100 = Percentage
Example: 75 bps = 75 ÷ 100 = 0.75%
Impact of Basis Points
On a $100,000 investment:
| Fee | Annual Cost |
|---|---|
| 10 bps (0.10%) | $100 |
| 50 bps (0.50%) | $500 |
| 100 bps (1.00%) | $1,000 |
| 200 bps (2.00%) | $2,000 |
Over 30 years with compounding, these differences become substantial.
Exam Alert
1 basis point = 0.01% = 1/100 of 1%. 100 basis points = 1%. Used to avoid ambiguity in rate discussions. Know how to convert between bps and percentages!