What is a Basis Point (BPS)

Basis Point Definition

A Basis Point is a standard unit of measurement used in finance to describe very small changes in percentages. One basis point equals 0.01%, or one one-hundredth of a percent. It is commonly written as BPS or bp.

Basis points exist for one reason: clarity. When money, interest rates, and investments are involved, vague language can be expensive. Basis points remove ambiguity and make financial communication precise.

What is a Basis Point in Simple Terms

If percentages feel abstract, think of basis points as the “fine print” version of percent changes.

• 1 Basis Point = 0.01%
• 10 Basis Points = 0.10%
• 100 Basis Points = 1.00%

So when a rate moves from 5.00% to 5.25%, that change is 25 basis points. Saying it this way avoids confusion and makes the size of the change immediately clear.

Why Basis Points Matter in Finance

Basis points matter because small percentage changes can have big dollar consequences.

A shift of just 25 or 50 basis points may look minor on paper, but when applied to:

• Mortgages
• Business loans 
• Bonds
• Investment portfolios

…the impact compounds quickly. Over long time periods, even tiny differences in rates can translate into thousands—or millions—of dollars.

Basis Points Explained vs Percentages

Basis Points vs Percentage Points

This is where most people get tripped up.

Basis points clearly describe the movement, not the final value.

Common Misunderstandings About BPS

A common mistake is saying “rates increased by 1%” when the rate actually moved from 4% to 5%. That change is 100 basis points, not a vague “1% increase.” Precision matters—especially in finance.

BPS Calculation: How Basis Points Are Calculated

Once you know the formula, BPS calculation is straightforward.

Basis Points Formula

Basis Points = (New Rate − Old Rate) × 10,000

This works because one full percent equals 100 basis points, and each basis point equals 0.01%.

Converting Basis Points to Percentages

To go the other direction:

Percentage = Basis Points ÷ 100

Examples:

• 25 BPS = 0.25%
• 50 BPS = 0.50%
• 150 BPS = 1.50%

Basis Points Example in Real Life

Basis Points Example in Loans

If a loan rate increases from 7.00% to 7.75%, that change equals 75 basis points.

While 0.75% may sound small, over a multi-year loan it can noticeably increase monthly payments and total interest paid.

Basis Points Example in Investments

Investment fees are often quoted in basis points. A fund charging 40 BPS costs 0.40% annually. If that fee rises to 60 BPS, investors experience a 20 BPS increase, directly reducing long-term returns.

Basis Points and Interest Rates

Basis Points Interest Rates in Banking

Banks routinely adjust interest rates in basis points, not whole percentages. When a bank announces a “25 basis point cut,” it means rates dropped by 0.25%.

This language ensures everyone—from analysts to borrowers—interprets the change the same way.

Central Banks and Basis Points

Central banks announce policy moves almost exclusively in basis points. A 25 BPS hike signals caution, while a 75 BPS hike signals urgency. Markets react strongly because these small changes ripple through borrowing, spending, and investment behavior.

How Basis Points Affect Mortgages and Credit Cards

In lending, basis points can be the difference between a good deal and an expensive mistake. A mortgage rate that’s just 15–20 BPS lower can save borrowers thousands over time.

Credit cards are even more sensitive. When benchmark rates rise by 100 BPS, variable APRs often follow—making carried balances much more costly.

Basis Points in Bonds and Fixed-Income Markets

Bond yields move in basis points every day. Because bond prices and yields move in opposite directions, even a 5–10 BPS shift can meaningfully affect portfolio values.

For institutional investors managing large sums, one basis point can equal six or seven figures in value.

Basis Points in Stocks, ETFs, and Mutual Funds

Expense ratios are commonly quoted in basis points:

• 5–10 BPS: ultra-low-cost index funds
• 50–100 BPS: actively managed funds

Over decades, small fee differences compound dramatically, making basis points a critical factor in long-term investing decisions.

Advantages of Using Basis Points

• Removes ambiguity in financial communication
• Allows precise discussion of small changes
• Universally understood in global markets
• Ideal for comparing rates, fees, and yields

Limitations of Basis Points

• Can feel unintuitive for beginners
• Requires basic familiarity with percentages
• Mostly useful within finance-related contexts

Despite this, basis points remain the clearest way to discuss rate changes.

Frequently Asked Questions (FAQs)

What is a Basis Point (BPS)?

A basis point is a unit equal to 0.01%, used to measure small changes in financial rates.

How many basis points are in 1 percent?

There are exactly 100 basis points in 1%.

Why do banks use basis points instead of percentages?

They eliminate confusion and allow precise communication of rate changes.

What is the basis points formula?

(New Rate − Old Rate) × 10,000.

How do basis points affect interest rates?

Even small BPS changes can significantly alter borrowing costs and investment returns.

Are basis points only used in banking?

No. They are widely used in investing, bonds, funds, and central bank policy.

Conclusion: Why Small Numbers Create Big Financial Impact

Basis points may look insignificant, but they quietly shape interest rates, loans, investments, and entire financial markets. Understanding how they work gives you a clearer view of financial news and helps you make smarter money decisions.

In finance, precision isn’t optional—and basis points are how that precision is delivered.