Basis point definition

What is a basis point?

A basis point is a unit of measurement used to quantify the change between two percentages – it can also be referred to as ‘bp’, which is pronounced ‘bip’ or ‘beep’. A basis point is equal to one hundredth of one percent, or 0.01%.

This means that a 0.01% change is a one-bp move, a 1% change is a 100-bp move, and a 10% change is a 1000-bp move.

Basis points are commonly used to define interest rates, quote price changes in the stock market, and outline the cost of exchange-traded funds and mutual funds. They help traders and analysts clarify the change between two percentages – instead of saying a 10% increase on a 10% rate, it can be described as a 1000 bps change. By creating a universal measure, any confusion over movements in prices and interest rates is eliminated.

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Example of a basis point

Changes in prices or rates don’t have to be large to have a significant impact on financial markets, which is why basis points are used to explain changes in percentages that are less than 1%.

For example, central bank interest rate changes often have a major impact on markets, even when the change is just a few basis points. Let’s say that the Federal Reserve is going to increase the interest rate. The current rate is set at 1%, and they have decided on a rise of 30 basis points. This would mean the interest rate has risen by 0.3% – so from 1% to 1.3%.

The same is true for changes in the yield available from certain investments. If $10,000 is invested in an instrument with a yield, then each basis point move would be equal to $1 of profit returned.

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