Basis Points also termed as bps is a unit of measurement used to calculate the interest rates, the return on fixed-income securities, and other rates used in finance.
It is a measure that describes a percentage change in the value of financial instruments.
1 bps is equal to 0.01% (1/100th of a percent) or 0.0001 in decimal form.
In a bond market, the basis point refers to the yield that the bond pays to the investor.
Percentage | Basis Points |
0.01% | 1 |
0.1% | 10 |
0.5% | 50 |
1% | 100 |
10% | 1000 |
100% | 10000 |
For example, the difference between bond interest rates of 8.55 percent and 8.35 percent is 0.2 percent, equivalent to 20 basis points.
To convert the number of basis points to a percentage divide it by 100 and to turn a percentage into basis points multiply the percentage by 100.
Common examples where BPS is applied are:
Treasury Bonds
Corporate Bonds
Interest rate derivatives
Equity securities
Mortgage loans
Options contract and Futures contract.
The investors use basis points because :
Basis points are used to show small changes relevant to the financial measures. Smaller numerical change is easy to represent in basis points instead of a percentage.
The bps metric provides transparency when discussing relative and absolute interest rates. For example, if an interest rate increases from 12% to 13% some may use the absolute method to express it by expressing it as a 1% increase and others may use the relative method to denote it as a 9.09% increase. Basis points restrict this confusion by denoting it as a 100 bps increase.
