Basis point
Family IX · Macro
Not to be confused with basis.
Basis point (often abbreviated as bp or bps) is a unit of measure equal to one hundredth of one percentage point, or 0.01%. It is used to express changes in interest rates, bond yields, and other financial percentages with precision, avoiding the ambiguity of phrases like "a quarter percent".
Definition and usage
A basis point is defined as 0.01 percentage point. Therefore, 100 basis points equal 1 percentage point. For example, an interest rate that moves from 5.00% to 5.25% has increased by 25 basis points. Basis points are commonly used in fixed income, foreign exchange, and derivatives markets to describe small changes in yields, spreads, and fees.
The unit is particularly useful when discussing differences that are less than 1%, where using percentages could lead to confusion. Saying "a 0.5% increase" could mean an absolute change of 0.5 percentage points or a relative change of 0.5% of the current value. Basis points eliminate this ambiguity.
Worked example
Suppose a bond yield rises from 2.50% to 2.75%. The change in percentage points is 0.25, which is 25 basis points. The calculation is:
Common contexts
Basis points appear in many financial contexts:
- Central bank rates: A central bank might raise its policy rate by 25 basis points.
- Bond spreads: The difference between two bond yields is often quoted in basis points.
- Fees: Investment management fees are sometimes expressed in basis points, such as 50 bp (0.50%).
- Interest rate swaps: The fixed rate in a swap might be quoted as a spread over a benchmark, in basis points.
In all these cases, the basis point provides a consistent and precise way to communicate small percentage changes.
Often confused with
- basis
- The difference between the spot price of an asset and its futures price, or between a cash market price and a related reference price, quoted as a premium or discount.
See also
- bond yield
- central bank
- commodity currency
- consumer price index
- currency devaluation
- currency intervention