Basis points (BPS) is the common term for 1/100th of 1 percent or 0.01%. This unit might not seem worth naming, but in bond markets for example, this is the unit for measuring daily price movements and credit spreads – i.e. the interest rate premium charged to a company because it is a weaker credit risk than the Government. You cannot read the financial press without tripping over basis points.
What are Basis Points?
A basis point (BPS) is equivalent to 1/100th of 1 percent or 0.01%. For instance, if an interest rate shifts from 5.00% to 5.25%, it has risen by 25 basis points.
Basis Point to Percentage Conversion
Translating between basis points and percentage is a direct process:
- 1% = 100 basis points
- 0.01% = 1 basis point
To morph basis points into percentage, just divide by 100:
- 25 BPS = 25/100 = 0.25%
- 50 BPS = 50/100 = 0.50%
To switch a percentage to basis points, multiply by 100:
- 0.50% = 0.50 * 100 = 50 BPS
- 1.25% = 1.25 * 100 = 125 BPS
Uses of Basis Points in Financial Markets
Basis points are the standard unit of measurement in lots of financial markets:
- Pretty much anything to do with interest rates, bond yields, or lending rates. For example, if a bank elevates its prime rate from 4.50% to 4.75%, it increased rates by 25 BPS.
- Denoting bid-ask spreads on bonds and other fixed-income securities. A bid-ask spread of 5 BPS suggests a highly liquid bond.
- Enumerating fees for investment banking and other advisory services. As an illustration, a mergers & acquisitions advisor may charge around 100 BPS (1%) based on the transaction size, depending on the deal’s intricacies.
- Gauging investment performance over specific durations. Investors might gauge returns against a benchmark in basis points, not just percentage points.
- Drawing comparisons between yields or returns of varied financial assets. A corporate bond, for instance, might yield 50 BPS more than a Treasury of a similar maturity.
