What Are Basis Points?
Basis points, otherwise known asbps or "bips," are a unit of measure used in finance to describe the percentage change in the value of financial instruments or the rate change in an index or other benchmark. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. Likewise, a fractional basis point such as 1.5 basis pointsis equivalent to 0.015% or 0.00015 in decimal form.
In most cases, basis points referto changes in interest rates and bond yields.
Key Takeaways
- Basis points, otherwise known asbps or "bips," are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.
- One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.
- To convert basis points to a percentage, divide the basis points number by 100.
- To determine the number of basis points that a percent represents, multiply the percent by 100.
Understanding Basis Points
To understand the practical usage of basis points, consider the following example. In May 2023, the Federal Open Market Committee (FOMC) increased the benchmark rateby 25 basis points, or 0.25 percentage points, to a range of 5% to 5.25%. The benchmark rate is what banks charge each other for overnight lending, which feeds into the rates consumers get. With this move, money became more expensive to borrow.
In the bond market, basis points are used to refer to the yields that fixed income instruments pay investors. For example, if a bond yield spikes from 7.45% to 7.65%, it is said to have risen 20 basis points.
Consider the following statement: "Thebond's yieldwas 10% before rising 5%." This expression may be interpreted in two entirely different ways. In one scenario, the 5% increase is absolute, in which case the new yield is 15%. Alternatively, the increase could have been relative, where 5% of 10% is 0.5%. In this scenario, the new yield would be 10.5%.
Eliminating Ambiguity
Since one basis point is always equal to 1/100th of 1%, or 0.01%, the example above demonstrates how they caneliminate any ambiguity and create a universal measurement that can be applied to the yields of any bond. The increase from 10% is either 50 basis points (which is 10.5%) or 500 basis points (which is 15%).
Although basis points primarily designate yields and interest rates, they may likewise refer to the percentage change in the value of an asset such as a stock. For example, an analyst may describe how a stock index rose 134 basis points throughout the trading day. This represents a 1.34% increase in the value of that index.
| Basis Points | Percentage Terms |
| 1 | 0.01% |
| 10 | 0.1% |
| 50 | 0.5% |
| 100 | 1% |
| 1,000 | 10% |
| 10,000 | 100% |
Converting Basis Points to Percentages
The easiest way to convert basis points into a percent form is to simply take the number of basis points and multiply by 0.0001, which will convey the percent in decimal form. For example, if you wish to convert 384 basis points into a percent, simply multiply 384 by 0.0001. This will give you 0.0384, which is 3.84% (0.0384 x 100).
This calculation can also be done in reverse in order to ascertain the number of basis points that a percent represents, simply by dividing the percent (in decimal form) by 0.0001. For example, assuming the rate on a bond has risen 2.42%, an individual would take 0.0242 (2.42%/100) and divide by 0.0001 to get 242 basis points.
How Much Is 75 Basis Points?
75 basis points equals 0.75 percentage points. You can calculate this by dividing the basis points (75) by 100. 75/100=0.75.
How Much Is 50 Basis Points?
50 basis points are the equivalent of 0.5 percentage points. If the Fed increased interest rates from 4.75% to 5.25%, you could say that interest rates rose 50 basis points.
What Is 20 Basis Points?
20 basis points are the same as 0.2 percentage points. If, for example, a bond yield dropped from 7.65% to 7.45%, you could say it fell 0.2 percentage points or 20 basis points.
The Bottom Line
Basis points is a unit of measure used in finance to express percentage change. If, for example, the Fed hiked interest rates from 4% to 4.5%, you could say borrowing rates rose 0.5 percentage points or 50 basis points.
Basis points are commonly used in reference to interest rates and bond yields. However, they can also be used to describe movement in percentage terms of various other things, including the value of a stock. To ascertain the number of basis points that a percent represents, multiply the percent by 100.
Correction—Oct. 12, 2023: Clarified differences between percentage points and percent change.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
The Federal Reserve System. "Federal Reserve Issues FOMC Statement."
Open a New Bank Account
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Sponsor
Name
Description
