Basis Points: Understanding What They Are and How They Are Used

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.

Understanding Basis Points

To understand the practical usage of basis points, consider the following example. In May 2023, the Federal Open Market Committee (FOMC) increased the benchmark interest rate by 25 basis points, or 0.25 percentage points, to a range of 5% to 5.25%.

The benchmark rate is the rate banks charge each other for overnight lending, and it drives the rates that consumers pay. With this move, money became more expensive to borrow.

In the bond market, basis points are used when referring 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.

But 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%.

How could readers of that statement know which scenario was behind the rise in yield?

Eliminating Ambiguity

Since one basis point is always equal to 1/100th of 1%, or 0.01%, basis points can eliminate the ambiguity demonstrated by the example above 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 are used primarily when referring to 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.

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 divide by 100. For example, to convert 384 basis points, divide the figure by 100.

384 basis points / 100 = 3.84%

Likewise, you could multiply 384 by 0.0001 (one basis point), which will convey the basis points in decimal form. Then multiply that result by 100 for the percent form.

384 basis points x 0.0001 = 0.0384

0.0384 x 100 = 3.84%

This calculation can also be done in reverse in order to ascertain the number of basis points that a percentage represents. Simply multiply the percentage by 100. For example, assume the rate on a bond has risen 2.42% and you want to know that in basis points.

2.42% x 100 = 242 basis points

Or, you could convert the percentage to decimal form and then divide the result by 0.0001.

2.42% / 100 = 0.0242

0.0242 / 0.0001 = 242 basis points

The Bottom Line

Basis points are a unit of measure used in finance to express percentage change. If, for example, the Fed hiked interest rates from 4% to 4.5%, you could say borrowing rates rose 0.5 percentage points or 50 basis points.

Basis points are commonly used in reference to interest rates and bond yields. However, they can also be used to describe movement in percentage terms of various other things, including the value of a stock. To ascertain the number of basis points that a percent represents, multiply the percent by 100.

Correction—Oct. 12, 2023: Clarified differences between percentage points and percent change.