Basis point

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A basis point (often denoted as bp or ‱; rarely, permyriad) is a unit relating to interest rates that is equal to 1/100th of a percentage point per annum. It is frequently but not exclusively used to express differences in interest rates of less than 1% pa. It avoids the ambiguity between relative and absolute discussions about rates. For example, a "1% increase" from a 10% interest rate could refer to an increase either from 10% to 10.1% (relative), or from 10% to 11% (absolute).

It is common practice in the financial industry to use basis points to denote a rate change in a financial instrument, or the difference (spread) between two interest rates, including the yields of fixed-income securities.

Since certain loans and bonds may commonly be quoted in relation to some index or underlying security, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest of 0.50% per annum above LIBOR is said to be 50 basis points over LIBOR, which is commonly expressed as "L+50bps" or simply "L+50".

[edit] Examples

A rate change from 5% pa to 6% pa is a change of 1 percentage point or 100 basis points.

A rate change from 6.7% pa to 6.9% pa reflects a change of 0.2 of a percentage point or 20 basis points.

A rate change from 2.75% pa to 3.20% pa reflects a change of 0.45 of a percentage point or 45 basis points.

A basis point is one percent of one percent which is 1/100 x 1/100 = 1/10,000.

What Does Basis Point - BPS Mean?

• A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument.
• The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
• The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points and 0.01% = 1 basis point.

A bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.

[edit] See also

• Percent (%) 1 part in 100
• Permille (‰) 1 part in 1000
• Parts-per notation
• Percentage in point