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 June 2017, the Federal Open Market Committee (FOMC) increased the benchmark rates by 25 basis points to a range of 1% to 1.25%. This means that rates were increased by 0.25% percentage points from a range of 0.75% to 1%.

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. What is an adjusted cost basis and how is it calculated?

    Learn what adjusted cost basis is, how it is calculated, and why this metric is important for investors, business owners ... Read Answer >>
  2. Why do credit card companies calculate revenue splits in terms of basis points?

    Discover how revenue splitting works and how credit card companies are able to utilize basis points in revenue splits to ... Read Answer >>
  3. What causes a bond's price to rise?

    Learn about factors that influence the price of a bond, such as interest rate changes, credit rating, yield and overall market ... 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. Investing

    How Points Relate to Financial Instruments

    Points usually refer to the measurement of some change in a financial instrument’s value.
  3. Managing Wealth

    What Determines Your Cost Basis?

    The cost basis is the initial price paid in an exchange for a product or service.
  4. Managing Wealth

    Cost Basis Basics

    The term "cost basis" refers to the original value of a security you own. When you sell a stock, bond or mutual fund, you use the cost basis to determine your profit or loss, which in turn affects ...
  5. Taxes

    A Tax Primer for Homeowners

    Go beyond interest and find out how mortgage points affect your taxable income.
  6. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  7. Insights

    Fed Hikes 25 Basis Points, Signals Two More Hikes in 2017

    As expected the Fed raised the fed funds rate by 25 basis points.
  8. Investing

    Understanding Bond Quotes

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

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
RELATED TERMS
  1. Price Value of a Basis Point - PVBP

    A measure used to describe how a basis point change in yield ...
  2. Decimal Trading

    A system in which the price of a security is quoted using a decimal ...
  3. Decimalization

    A system where security prices are quoted using a decimal format ...
  4. Points

    1. A 1% change in the face value of a bond or a debenture. 2. ...
  5. Closing Points

    Points that are paid at the time of closing of a mortgage transaction. ...
  6. Cost Basis

    1. The original value of an asset for tax purposes (usually the ...
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center