Basis Points

What are Basis Points?

Basis points are a financial unit that measures the changes in interest rates. From a mathematical standpoint, one basis point is equal to 0.01%.

Table of Contents Table of Contents

1. What are Basis Points?
2. Key Takeaways
3. How to Calculate Basis Points
4. How & Why Basis Points are Used
5. Price Value of a Basis Point
6. Basis Points Example
7. Basis Point's Impact on Finances
8. Basis Points Benefits and Drawbacks
9. The Bottom Line
10. FAQs

Show Full Guide

Table of Contents

1. What are Basis Points?
2. Key Takeaways
3. How to Calculate Basis Points
Show Full Guide
4. How & Why Basis Points are Used
5. Price Value of a Basis Point
6. Basis Points Example
7. Basis Point's Impact on Finances
8. Basis Points Benefits and Drawbacks
9. The Bottom Line
10. FAQs

How to Calculate Basis Points

Basis points in finance are calculated by converting percentages.

The formula to convert to basis points is quite simple:

Basis Points = 0.75 x 100

Basis Points = 75 basis points

If you’d like to determine the change in basis points between two percentages, you can use the following formula:

Basis Point Change = (New Percentage – Old Percentage) x 100

Let’s say you want to know the basis point change for interest rates that went from 2.00% to 2.50%. You could use the previous formula:

Basis Point Change = (2.50% – 2.00%) x 100

Basis Point Change = 50

In this example, the interest rate increased by 50 basis points.

How & Why Basis Points are Used

With the introduction of more complex financial products, small changes in interest rates across markets became more important.

Therefore, industry professionals searched for a way to describe small percentage changes that could help when comparing rates and products.

The term “basis point” was created to do just this: describe small or even minuscule changes in rates that can have an important impact on markets.

Price Value of a Basis Point

Basis Points Example

You’ll find basis points used most often when listening to financial professionals or media discussing changes in interest rates or other financial metrics.

For instance, imagine you are watching your favorite financial news network, and the analysts are arguing about what change the Federal Reserve might make to interest rates.

The conversation might go something like this:

Anchor: “We recently saw unemployment and inflation data come in, and with the Federal Reserve set to make their latest interest rate policy change, I’m wondering what you both think the Fed will do.”

Guest #1: “Given the data, I don’t see the Fed raising rates more than 25 basis points this time around, but it could raise rates by 25 basis points multiple times this year.”

Guest #2: “What I see in the numbers is that inflation is still running hot, which is still a problem for the current economy. Therefore, I could imagine the Fed raising rates by 50 basis points to help cool the economy and ensure inflation doesn’t get too out of control.”

In this conversation, both anchors are arguing their points as to why rates could change by 25 basis points (0.25%) or 50 basis points (0.50%).

Basis Point’s Impact on Finances

Changes in basis points can have an important impact on financial markets.

Here are several examples where basis points play a key role:

Basis Points Benefits and Drawbacks

Basis points have several benefits in the way they are used:

The Bottom Line

Basis points is a term that’s exclusively utilized in the financial sector.

As a representation of percentages, the definition of basis points is simply a linguistic way to create standardization and clarity when discussing interest rates and other financial metrics.

FAQs