Glossary term
Basis Point
A basis point is one one-hundredth of a percentage point, or 0.01%.
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What Is a Basis Point?
A basis point is one one-hundredth of a percentage point, or 0.01%. Basis points are commonly used to describe small changes in interest rates, bond yields, investment fees, mortgage rates, and credit spreads.
The abbreviation is usually bp for one basis point and bps for plural basis points. People often pronounce bps as “bips.”
Key Takeaways
- One basis point equals 0.01 percentage points.
- One hundred basis points equal 1 percentage point.
- Basis points reduce confusion when discussing rate changes.
- They are common in lending, bonds, fund fees, and central bank policy.
- A basis-point change is an absolute change in a rate, not a relative percentage change.
How Basis Points Work
If an interest rate rises from 4.00% to 4.25%, it rose by 25 basis points. Saying “25 basis points” is clearer than saying “0.25%,” because 0.25% could be misunderstood as a relative increase rather than a change of 0.25 percentage points.
Basis points are especially useful when changes are small but meaningful. A 10-basis-point fee difference may sound tiny, but over many years it can affect investment returns. A 50-basis-point mortgage-rate move can change a borrower's monthly payment.
The unit is also useful for spreads. If a corporate bond yields 175 basis points more than a comparable Treasury, that spread is 1.75 percentage points. The basis-point language makes the risk premium easier to compare across bonds and time periods.
Basis Point Conversion
Basis points | Percentage points | Decimal form |
|---|---|---|
1 bp | 0.01% | 0.0001 |
10 bps | 0.10% | 0.0010 |
25 bps | 0.25% | 0.0025 |
50 bps | 0.50% | 0.0050 |
100 bps | 1.00% | 0.0100 |
Why It Matters
Basis points are the language of rate precision. Central bank decisions, bond yield spreads, management fees, loan pricing, and credit risk premiums are often quoted this way because small differences can have large dollar effects.
For example, an investment fund charging 20 basis points costs 0.20% per year. A similar fund charging 80 basis points costs 0.80% per year. The 60-basis-point difference compounds over time because fees reduce the amount left invested.
Borrowers see the same effect in reverse. A small basis-point difference in a mortgage, business loan, or credit line can become meaningful when applied to a large balance for many years.
Limits and Misunderstandings
The most common mistake is confusing basis points with percent change. A move from 5% to 6% is a 100-basis-point increase, but it is also a 20% relative increase from the original 5% rate. Those are different statements.
Another mistake is assuming basis points are always small in dollar terms. A few basis points can matter a lot when applied to large bond portfolios, mortgages, institutional loans, or long investment horizons.
The Bottom Line
A basis point is 0.01 percentage points. It is a precise way to discuss rate, yield, spread, and fee changes without confusing absolute percentage-point moves with relative percentage changes.