Basis Point (BPS)

Definition

A basis point (bp or bps) is a unit for measuring changes in interest rates, yields, fees, or spreads.
– 1 basis point = 0.01% = 0.0001 in decimal form.
– It removes ambiguity when discussing small percentage moves.

Key takeaways

• Common financial unit for interest rates, bond yields, credit spreads, and fund fees.
• 1 bp = 0.01% (1/100th of 1%).
• Used to clearly communicate small changes that would be confusing if described as relative percentages.

How basis points are used

Basis points express absolute differences or changes in percentage terms so small moves are clear:
– Rate change: 4% → 3.5% = −50 bps (−0.50 percentage points).
– Yield change: 5% → 5.2% = +20 bps.
– Dividend yield: 3% → 3.3% = +30 bps.
– Fee comparison: 0.15% management fee = 15 bps.

Traders, analysts, and risk managers use bps to describe moves in interest rates, bond yields, credit spreads, and sometimes precise equity or FX changes.

Price value of a basis point (PVBP / DV01)

PVBP (also called DV01) measures the change in a bond’s price for a 1 bp change in yield:
– Approximate relation: PVBP ≈ −(Modified duration) × Price × 0.0001.
– It is a dollar measure of interest-rate sensitivity and is used in risk management and hedging.
– Example use: stress tests might ask how a portfolio performs under a 200 bp shock, then refine results in bp increments.

Basis points and credit spreads

Credit spreads are normally quoted in bps. The spread = yield(corporate) − yield(government).
– Example: Corporate 3.0% vs. Government 2.0% = 100 bps spread.
– Wider spreads (more bps) signal higher perceived credit risk and typically lower bond prices; narrower spreads indicate lower perceived risk and generally higher bond prices.

Impact on personal finances

Small changes measured in bps can affect borrowing costs and returns:
– A 25 bp Fed hike can raise variable mortgage and credit-card rates and increase savings yields.
– Differences of a few bps in fund expense ratios compound over time and can materially affect long-term returns.

Practical examples and real-life uses

• Central-bank announcements are often reported in bps (e.g., a 25 bp rate increase).
• Comparing fund fees: 0.35% vs. 0.45% = 10 bps difference.
• Traders describe bond-yield moves and credit-spread changes in bps for precision.
• Risk managers use bps increments in scenario analysis (e.g., +50 bps, +200 bps).

Conversions

• To convert bps to percent: divide by 100.
• 50 bps → 0.50%
• To convert percent to bps: multiply by 100.
• 0.25% → 25 bps
• Decimal form: 1 bp = 0.0001.

Frequently asked questions

Q: Why use basis points instead of percentages?
A: Bps remove ambiguity between relative and absolute percentage changes and make small moves explicit.

Q: Where does “basis point” come from?
A: From “basis,” meaning the spread or difference between two interest rates.

Q: How much is one basis point?
A: 1 bp = 0.01% (1/100th of 1%).

Bottom line

Basis points are a compact, unambiguous way to report small absolute changes in rates, yields, spreads, and fees. They are essential for clear communication in investing, risk management, and finance.