Basis point

Basis Point

A basis point (often denoted as bp, bps, or bip) is 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.

Definition and Usage

In the financial industry, basis points are 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.

Basis points are also used for measuring the cost of credit for loans, particularly for those involving large amounts where a small change in percentage can result in significant monetary differences.

Calculation

To calculate the change in value that a basis point represents, one can use the formula:

Change in Value = Principal Amount * Number of Basis Points * 0.0001

Examples

If the Federal Reserve increases the target interest rate by 25 basis points, it means the rate increases by 0.25%. Similarly, if a bond yield falls by 10 basis points, it means the yield decreases by 0.10%.

See Also

• Percentage point
• Financial markets
• Interest rate
• Yield (finance)