Basis Point

Term of the Day - 16 January 2024

Today’s Term is “Basis Point”.

A basis point (bps) is a unit of measure used in finance to express small percentage changes in interest rates, yields, or other financial instruments.

One basis point is equivalent to one-hundredth of a percentage point, or 0.01%. Therefore, if a financial metric changes by 25 basis points, it has changed by 0.25%, and if it changes by 100 basis points, it has changed by 1%.

For instance, if the interest rate on a loan increases from 3.25% to 3.50%, it has risen by 25 basis points. Alternatively, if the interest rate on a bond increases from 2.75% to 3.75%, it has experienced a change of 100 basis points. The initial interest rate of 2.75% plus 100 basis points equals the new interest rate of 3.75%.

Both examples illustrate how basis points provide a precise way to communicate and quantify changes in financial metrics, making discussions in the world of finance more accurate and efficient.

Basis points are crucial in financial markets, where even slight changes in interest rates or yields can significantly impact investment returns, borrowing costs, and financial performance. Traders, investors, and analysts commonly use basis points to communicate and quantify these changes accurately, making it a convenient unit of measurement in the world of finance.