What Are Basis Points?
Basis points, otherwise known as bps or "bips," are a unit of measure used in finance to describe the percentage change in the value of financial instruments or the rate change in an index or other benchmark. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. Likewise, a fractional basis point such as 1.5 basis points is equivalent to 0.015% or 0.00015 in decimal form.
In most cases, basis points refer to changes in interest rates and bond yields.
- Basis points, otherwise known as bps or "bips," are 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.
- In the bond market, a basis point is used to refer to the yield that a bond pays to the investor.
Understanding Basis Points
To understand the practical usage of basis points, consider the following example. In June 2017, the Federal Open Market Committee (FOMC) increased the benchmark rate 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 1% to 1.25%.
In the bond market, basis points are used to refer 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.
Consider the following statement: "The bond's yield was 10% before rising 5%." This expression may be interpreted in two entirely different ways. In one scenario, the 5% increase is absolute, in which case the new yield is 15%. Alternatively, the increase could have been relative, where 5% of 10% is 0.5%. In this scenario, the new yield would be 10.5%.
Since one basis point is always equal to 1/100th of 1%, or 0.01%, the example above demonstrates how they can eliminate any ambiguity and create a universal measurement that can be applied to the yields of any bond. The increase from 10% is either 50 basis points (which is 10.5%) or 500 basis points (which is 15%).
Although basis points primarily designate 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. This represents a 1.34% increase in the value of that index.
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Converting Basis Points to Percentages
The easiest way to convert basis points into a percent form is to simply take the number of basis points and multiply by 0.0001, which will convey the percent in decimal form. For example, if you wish 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).
Understanding Basis Points
This calculation can also be done in reverse in order to ascertain the number of basis points that a percent represents, simply by dividing the percent (in decimal form) by 0.0001. For example, assuming the rate on a bond has risen 2.42%, an individual would take 0.0242 (2.42%/100) and divide by 0.0001 to get 242 basis points.
The Federal Reserve System. "Federal Reserve Issues FOMC Statement."