Basis Point (BPS)

AAA

DEFINITION of 'Basis Point (BPS)'

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. 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 point bps

INVESTOPEDIA EXPLAINS 'Basis Point (BPS)'

The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. It is common for bonds and loans to be quoted in basis point terms. For example, it could be said that the interest rate offered by your bank is 50 basis points higher than LIBOR. A bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points. Or, if the Federal Reserve Board raises the target interest rate by 25 basis points, it means that rates have risen by 0.25% percentage points. If rates were at 2.50%, and the Fed raised them by 0.25%, or 25 basis points, the new interest rate would be 2.75%.

By using basis points in conversation, traders and analysts remove some of the ambiguity that can arise when talking about things in percentage moves. For example, if a financial instrument is priced at a 10% rate of interest and the rate experiences an increase of 10%, it could conceivably mean that it is now 10% x (1 + 0.10) = 11% OR it could also mean 10% + 10% = 20%. The intent of the statement is unclear. Use of basis points in this case makes the meaning obvious: if the instrument is priced at a 10% rate of interest and experiences a 100 bp move up, it is now 11%. The 20% result would occur if there were instead a 1,000 bp move.

The Price Value of a Basis Point (PVBP) is a measure of the absolute value of the change in price of a bond for a one basis point change in yield. It is another way to measure interest-rate risk, similar to duration which measures the percent change in a bond price given a 1% change in rates.

PVBP is just a special case of dollar duration. Instead of using a 100 basis point change, the price value of a basis point simply uses a 1 basis point change. 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 1 bp move.

The "basis" in basis point comes from the base move between two percentages, or the spread between two interest rates. Because the changes recorded are usually narrow, and because small changes can have outsized outcomes, the "basis" is a fraction of a percent.

VIDEO

Loading the player...
RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Nickel

    A slang term meaning five basis points, or five pips. A nickel ...
  3. Beep

    Financial industry jargon for "basis point." The term came into ...
  4. Pip

    The smallest price change that a given exchange rate can make. ...
  5. Price Value of a Basis Point - ...

    A measure used to describe how a basis point change in yield ...
  6. Spreadlock

    An agreement that establishes a predetermined spread for future ...
RELATED FAQS
  1. Why do credit card companies calculate revenue splits in terms of basis points?

    Credit card companies use basis points to calculate revenue splits because it allows them flexibility in arrangements with ... Read Full Answer >>
  2. Why are bond yields calculated in terms of basis points?

    Basis points, or bps or "bips," are often used in finance to measure meaningful changes less than 1% in size. There are two ... Read Full Answer >>
  3. What is a pip and what does it represent?

    A pip is a very small measure of change in a currency pair in the forex market. It can be measured in terms of the quote ... Read Full Answer >>
  4. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  5. What is the value of one pip and why are they different between currency pairs?

    In forex markets, currency trading is done on some of the world's most powerful currencies. The major currencies traded are ... Read Full Answer >>
  6. What does the Macaulay duration indicate about a bond?

    The Macaulay duration measures the present value weighted average maturity for a bond. It describes how sensitive a bond’s ... Read Full Answer >>
Related Articles
  1. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  2. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  3. Investing Basics

    Explaining Fixed Income

    A person living off a fixed income is usually a retiree receiving a fixed, steady monthly inflow of cash.
  4. Mutual Funds & ETFs

    Is the DSUM Yuan Fixed Income ETF a Good Bet?

    An an depth look at PowerShares Chinese Yuan Dim Sum Bond ETF and its risks.
  5. Trading Strategies

    Top 3 High Yield Stocks with Growth Potential

    High yield and growth potential don't often go hand in hand, except when it comes to these three stocks.
  6. Mutual Funds & ETFs

    Top Foreign Debt ETFs & Funds for Diversification

    Foreign fixed income options for investors seeking capital preservation and diversification
  7. Mutual Funds & ETFs

    Top 4 High-Yielding Preferred Stock ETFs

    ETFs offer diversification, a clear advantage. Preferred stock ETFs offer even more.
  8. Investing Basics

    What is a "Coupon"?

    In the financial world, “coupon” represents the interest rate on a bond.
  9. Stock Analysis

    Is it Time to Buy Floating Rate Bonds?

    The Fed’s awaited interest rate hike could finally be at hand. Are floating rate bonds the way to go?
  10. Investing Basics

    Treasury Inflation-Protected Securities (TIPS)

    Treasury inflation-protected securities are treasury securities that make adjustments for inflation as reflected in the Consumer Price Index.

You May Also Like

Hot Definitions
  1. Standard Error

    The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the ...
  2. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
  3. Unearned Revenue

    When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can ...
  4. Trailing Twelve Months - TTM

    The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation ...
  5. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known ...
  6. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular types of transactions and other events should be reported ...
Trading Center