Although basis points are used primarily when referring to 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. For example, if the federal funds rate goes up by 50 basis points and the prime rate follows suit, the annual percentage rate (APR) on a credit card might jump by 50 basis points—from 20.99% to 21.49%, for example. Two words—basis points—are the key to measuring increases and decreases in interest rates. Changes in interest rates affect the mortgage you take out to purchase a home, the loan you get to buy a car and the amount of interest a bank or credit union pays on a savings account. Basis points help communicate small percentage changes and are easier to say and understand without a calculator in hand.
Why Should I Use Basis Points Instead of Percentages?
By using basis points in the conversation, traders and analysts remove some of the ambiguity or confusion that can arise when talking about percentage moves. Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. The easiest way to convert basis points into a percent form is to simply take the number of basis points and divide by 100.
What Is a Basis Point?
Market risk, or the risk of losses due to changes in market conditions, can also be assessed using basis points. Fluctuations in market variables such as equity prices, foreign exchange rates, and commodity prices can be measured in basis points. For example, it could be said that the interest rate offered by your bank is 50 basis points higher than the Secured Overnight Financing Rate (SOFR). A bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points.
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You often see or hear basis points mentioned when the Federal Open Market Committee (FOMC), a branch of the Federal Reserve System, raises or lowers the federal funds rate. If a lender informs you that the interest rate on a 30-year adjustable-rate mortgage (ARM) went up by 50 basis points, the rate might go from 5.50% to 6.00%. Taking those numbers into account, 10 basis points—abbreviated as bps—amount to 0.10%, 25 basis points add up to 0.25%, 50 basis points are equal to 0.50%, 75 basis points mean 0.75% and 100 basis points make 1.00%. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. Here’s what you need to know about basis points, how they are calculated and how to convert them to a percentage.
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You’ll often find them in news coverage or conversations around financial topics, such as changes in interest rates, and political polls and in scientific data. Oftentimes, traders will use basis points to refer to the change in value of a security or when comparing the rates on different securities. For example, you may hear the term used when yields on corporate bonds and treasury securities are compared. The reason that traders use basis points to express changes in value or rate is that they can be clearer and prevent any ambiguity. Since the values of financial instruments are often highly sensitive to even small changes in underlying interest rates, ensuring clarity can be very important for traders.
Beyond markets, they’re very often used to describe percentage amounts even for non-financial purposes. By expressing the percentage in the form of basis points, the incremental changes, such as the spread on bond yields, are easier to discuss, and the probability of misinterpretation is reduced. Within the finance industry, it is the norm to discuss interest rates in terms of basis points rather than percentages, especially regarding smaller figures. Using bps can be more convenient and reduce the chance of misinterpretations, as the expression is an absolute figure and is thus easier to understand than a small percentage. It helps avoid confusion when dealing with small numbers, such as when calculating percentage changes in yields, spreads, or interest rates. We believe everyone should be able to make financial decisions with confidence.
One basis point equals one-hundredth of a percentage point, or expressed numerically, 1/100th of 1.0%. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
- It does not matter if there is an increase or decrease in rates because such a small move in rates will be about the same in either direction.
- This may also be referred to as DV01, or the dollar value change for a one bp move.
- All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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A basis point is 1/100th of 1% and is commonly used to indicate interest rates or changes in rates in bonds and other financial instruments. The prime rate plays a big role in setting interest rates for lending products like credit cards, personal loans, variable-rate student loans, variable-rate mortgages and home equity loans. When the prime rate climbs, the cost of borrowing money typically climbs as well. Changes in credit spreads, therefore, measured in basis points, impact bond prices inversely. When credit spreads widen and there’s an increase in basis points, bond prices generally fall because investors demand higher yields to compensate for the increased risk.
Interest rates that have risen by 1% are said to have increased by 100 basis points. The word basis in the term basis point comes from the base move between two percentages, or the spread between two interest rates. Since the changes recorded are usually narrow, and because small changes can have outsized outcomes, the basis is a fraction of a percent.
We do not include the universe of companies or financial offers that may be available to you. Basis Points (bps) represent a unit of measurement for interest rates in finance and are equal to 1/100th of 1.0%. The term “basis points” is most often used when discussing the interest rate environment such as the Fed or in reference to bonds and fixed-income securities. Basis points help investors understand how small changes in interest rates or investment returns can impact them.
The precision of basis points allows for clear communication of even small changes in credit spreads, which is crucial for accurate market assessments. In the bond market, basis points are used when referring 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. Describing interest rates, spreads, and yields in terms of basis points tends to be more precise, as the implications of such minor changes can often be significant on the economy or instrument in question. Like percentage points, basis points avoid the ambiguity between relative and absolute discussions about interest rates by dealing only with the absolute change in numeric value of a rate.
For example, if a report says there has been a “1% increase” from a 10% interest rate, this could refer to an increase either from 10% to 10.1% (relative, 1% of 10%), or from 10% to 11% (absolute, 1% plus 10%). However, if the report says there has been a “100 basis point increase” from a 10% interest rate, then the interest rate of 10% has increased by 1.00% (the absolute change) to an 11% rate. Impact on your credit may vary, as credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations.
This may also be referred to as DV01, or the dollar value change for a one bp move. It is another way to measure interest rate risk and is similar to duration, which measures the percent change in a bond price given a 1% change in rates. Basis points are 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. They also are frequently used in the context of credit card rates, Treasury bonds and many other corners of the world of finance.
As with the prime rate, SOFR can make a difference in how much you pay in interest for certain lending products. It can also tell you the change in your annual percentage rate (APR), which is used to denote the yearly rate on loan products such as credit cards or mortgages. The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site.