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%.
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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 x 100 = Basis Points
Example: 0.25% = 0.25 x 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!
Study This Term In
Related Terms
Yield
Yield is the income return on an investment, expressed as a percentage, including interest or dividends received.
Expense Ratio
An expense ratio is the annual fee charged by a mutual fund or ETF to cover operating expenses, expressed as a percentage of assets under management. Lower expense ratios mean more of your money stays invested.
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