Basis Points

Basis points, often denoted as “BPS,” are a unit of measurement commonly used in finance and investments to express changes in interest rates, bond yields, or other percentages. One basis point is equal to one-hundredth of a percentage point, or 0.01%.

The term “basis” refers to a reference point or base, and “points” represent increments or steps. Therefore, basis points represent incremental changes or movements relative to a base value.

Understanding basis points with an example

Let’s say the interest rate on a loan is 7.50% and it increases by 25 basis points. To calculate the new interest rate, you would add 25 basis points to the original rate.

7.50% + 25 bps = 7.50% + 0.25% = 7.75%

So, a 25 basis point increase corresponds to a 0.25% increase in this case.

Basis points are commonly used to express changes in interest rates, bond yields, spreads, or other financial metrics where precision is required. They are particularly useful when discussing small percentage changes or comparing rates across different contexts.

For example, when discussing a change in a central bank’s policy rate from 2.00% to 2.25%, it is often expressed as a 25 basis point increase, which provides a clearer indication of the magnitude of the change compared to simply stating a 0.25% increase.