Loading the player...
A:

A basis point 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. Likewise, a fractional basis point like 1.5 basis point is equivalent to 0.015% or 0.00015 in decimal form.

In most cases, basis point refers to changes in interest rates and bond yields.

For example, in March 2017, the Federal Open Market Committee (FOMC) increased the benchmark rates by 25 basis points to a range of 0.75% to 1%. This means that rates were increased by 0.25% percentage points from a range of 0.5% to 0.75%.

In the bond market, a basis point is used to refer to the yield that a bond pays to the investor. For example, if a bond yield moves from 7.45% to 7.65%, it is said to have risen 20 basis points.

The usage of the basis point measure is primarily used in respect to yields and interest rates, but it may also be used to refer to the percentage change in the value of an asset such as a stock. It may be heard that a stock index moved up 134 basis points in the day's trading. This represents a 1.34% increase in the value of the index.

basis.gif

The easiest way to convert basis points into a percent form is by simply taking the amount of basis points and multiply by 0.0001 which will give the percent in decimal form. So if you have to convert 384 basis points into a percent, simply multiply 384 by 0.0001. This will give you 0.0384 which is 3.84% (0.0384 x 100).

This can also be done in reverse to find out the number of basis points that a percent represents by dividing the percent (in decimal form) by 0.0001. For example, say the rate on a bond has risen 2.42%, simply take 0.0242 (2.42% / 100) and divide by 0.0001 to get 242 basis points.

(For more on interest rate changes, see our Bond Basics Tutorial)

RELATED FAQS
  1. Why are bond yields calculated in terms of basis points?

    Find out why financial analysts and publications track and quote bond yields in basis points, or bps, rather than simply ... Read Answer >>
  2. What does it mean when someone says that a stock went up X points? Does this refer ...

    For stocks, one point equals one dollar. So when you hear that a stock has lost or gained X number of "points", this is the ... Read Answer >>
  3. Where did the term 'pip' in currency exchange come from?

    Learn the definition of a pip, what it means in the scope of currency exchanges and how to determine its value. Find out ... Read Answer >>
Related Articles
  1. Trading

    A Common Base for Understanding Changes in Value

    A discussion of basis points as well as basis point calculations using Excel.
  2. Managing Wealth

    Know Your Stock Cost Basis

    Understanding equity cost basis is critical for tracking the gains or losses of an investment.
  3. Trading

    Get Positive Results With Negative Basis Trades

    Capitalize on the difference in spreads between markets with this popular strategy.
  4. Investing

    Calculating Bond Equivalent Yield

    The bond equivalent yield calculates the semi-annual, quarterly or monthly yield on a discount bond or note.
  5. Investing

    Understanding Bond Quotes

    A bond quote is a bond’s trading price.
  6. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  7. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  8. Managing Wealth

    How Bond Prices and Yields Work

    Understanding bond prices and yields can help any investor in any market.
  9. Investing

    Top 4 Technology Mutual Funds for 2017

    The Nasdaq rally suggests it may be time to add technology exposure. Here are some top mutual funds to get you started.
RELATED TERMS
  1. Basis

    1. The variation between the spot price of a deliverable commodity ...
  2. Cost Basis

    1. The original value of an asset for tax purposes (usually the ...
  3. Points

    1. A 1% change in the face value of a bond or a debenture. 2. ...
  4. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  5. After-Tax Basis

    A comparison of the net yields produced by taxable and tax-exempt ...
  6. Annual Basis

    The return earned by an investment over the course of a year. ...
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  2. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  3. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  4. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  5. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  6. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
Trading Center