A basis point, often abbreviated as “”bps,”” is a unit of measure commonly used in finance and investments to express changes in percentage points. One basis point is equivalent to 1/100th of a percentage point, or 0.01%. In other words, 100 basis points make up 1% (percent).
Basis points are used to express small changes in interest rates, yields, spreads, fees, or other financial metrics that are typically presented in percentage terms. They are particularly useful when discussing changes in interest rates or bond yields, where even a small percentage change can have significant financial implications.
For example, if an interest rate increases from 3.50% to 3.75%, the change is 25 basis points (0.25%). Similarly, if the yield on a bond decreases from 5.25% to 5.10%, it represents a change of 15 basis points (0.15%). This allows for more precise communication and comparison of changes, especially in markets where even small fluctuations can have a substantial impact on financial transactions.