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Key Takeaways
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A basis point (bp) is a unit of measurement used to compare different percentages or ratios.
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To convert a percentage to basis points, multiply by 100.
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To convert basis points to a percentage, divide the basis points by 100.
Basis points are used to express changes in interest rates, bond yields and other financial instruments. Knowing how to calculate basis points can be important for investors and traders because it provides an accurate way to express small changes.
Here’s what you need to know about basis points, how they are calculated, and how to convert them to a percentage.
How basic points work
In finance, a basis point (bp) is a standard unit used to measure a percentage. It is equal to one hundredth of a percentage point, or 0.01 percent. Basic points are usually referred to by the abbreviations ‘bp’ or ‘bps’ and are pronounced ‘bips’.
Basic points help communicate small percentage changes and are easier to pronounce and understand without a calculator in hand. For example, a change from 4.25 percent to 4.50 percent is a difference of 25 basis points. Additionally, although percentages are often rounded to whole percentages, basis points maintain the precision needed to recognize smaller differences.
How basis points are calculated
Basic points are a fixed numerical value. That makes them useful for measuring percentages, such as interest rates, and for expressing changes at the decimal level.
Convert basis points to a percentage
Divide by 100 to convert basis points to a percentage. To convert a percentage back to basis points, multiply by 100.
Basic point calculation example:
60 fps / 100 = 0.60%
0.60% x 100 = 60 basis points
Why basic points are used
Investors, traders and analysts use basis points to more clearly explain changes in interest rates or amounts. Basis points are especially useful for comparing rates between different securities. For example, a Federal Funds Rate target of 0.25 percent is equivalent to a target of 25 basis points. Likewise, an annual fee of 75 basis points is the same as 0.75 percent of the portfolio’s value. They provide a more reliable and consistent measure of change, rather than ratios of percent change in terms of movement.
When basic points are used
Basis points are essential in several financial instruments, including mortgage loans, common stocks and government bonds. The use of basis points is also common when discussing returns on fixed income securities, equity indices, and gross profit and operating margins. Additionally, BPS can be used to express interchange fees, which are credit card processing fees.
In short
A basis point is a unit of measurement used to compare different percentages or ratios. It is calculated by multiplying the percentage by 100 and is often used to measure incremental changes in interest rates, yields and other financial instruments. Understanding how basis points work can help investors make more informed decisions and better understand the implications of changes in the financial markets.
