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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. 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.

Examples That Matter

For 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 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.

Consider the following statement: "The bond's yield was 10% before rising 5%." This scenario could be interpreted one of two ways. Perhaps the 5% increase was absolute, in which case the new yield is 15%. On the other hand, the increase could have been relative; 5% of 10% is 0.5%, so the new yield could be 10.5%.

Eliminating Ambiguity

Since one basis point is always equal to 1/100th of 1%, or 0.01%, the above example shows how they can eliminate any ambiguity and create a universal measurement that can be applied to yields of any bond. Either the increase from 10% is 50 basis points, which is 10.5%, or it is 500 basis points, which is 15%.

Basis points are used primarily with respect to yields and interest rates, but they 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.

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Converting Basis Points to Percentages

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)

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