Basis Point (BPS)
Quick Answer
A basis point, commonly abbreviated as BPS or bp, is a financial unit equal to one-hundredth of one percentage point. One basis point equals 0.01%, while 100 basis points equal 1 percentage point. Basis points are commonly used to describe small changes or differences in interest rates, bond yields and financial spreads.
How does a Basis Point work?
Basis points provide a precise way to describe changes in percentage-based financial figures.
The basic relationship is:
1 basis point = 0.01 percentage point
Therefore:
10 BPS = 0.10 percentage points
25 BPS = 0.25 percentage points
50 BPS = 0.50 percentage points
100 BPS = 1.00 percentage point
The Reserve Bank of Australia notes that basis points are commonly used in money and securities markets to describe differences in interest rates or yields.
Using basis points can remove ambiguity when discussing percentage changes.
For example, saying that an interest rate increased by 0.25% could potentially be misunderstood as a relative percentage increase. Saying it increased by 25 basis points clearly means the rate rose by 0.25 percentage points.
Key features of Basis Points
Several characteristics make BPS useful in finance:
Precise measurement: One basis point represents only 0.01 percentage point.
Easy rate comparison: BPS make small changes in rates and yields easier to communicate.
Common in fixed income: Bond yields and yield spreads are frequently expressed in basis points.
Common in monetary policy: Central-bank interest-rate changes are often discussed in increments such as 25, 50 or 100 basis points.
Useful for spreads: Differences between two interest rates or yields can be expressed clearly in BPS.
Not the same as percentage change: Basis points measure differences between percentage levels, not the relative percentage change between them.
Simple Basis Point example
Suppose an interest rate rises from:
4.00% to 4.25%
The difference is:
4.25% − 4.00% = 0.25 percentage points
Since:
1 percentage point = 100 BPS
then:
0.25 × 100 = 25 BPS
The interest rate therefore increased by:
25 basis points
Now suppose a bond yields 5.20% while another yields 4.70%.
The difference is:
5.20% − 4.70% = 0.50 percentage points
or:
50 basis points
These examples are illustrative only and do not represent actual FxGrow pricing, yields or interest rates.
Potential benefits and uses
Basis points provide a standard way to communicate relatively small differences in financial rates.
They can be used to describe:
central-bank policy-rate changes;
bond-yield movements;
yield spreads between securities;
lending-rate differences;
interest-rate margins;
changes in financing costs;
certain fee or pricing differences expressed as percentages.
The term is especially useful when differences are smaller than one percentage point because it avoids repeatedly using decimal percentages.
For example:
4.50% versus 4.60%
can be described simply as a:
10-basis-point difference
rather than a 0.10-percentage-point difference.
Risks, limitations and common misconceptions
A common misconception is that 100 basis points equals 100%.
It does not.
100 BPS = 1 percentage point
while:
10,000 BPS = 100 percentage points
Another common mistake is confusing percentage points with percentage change.
Suppose an interest rate rises from 4% to 5%.
The increase is:
1 percentage point = 100 basis points
But relative to the original 4% rate, the rate itself has increased by:
(5 − 4) ÷ 4 × 100 = 25%
These are two different measurements.
Basis points also do not indicate whether a change is economically large or small by themselves. The significance of a 25-BPS change depends on what is being measured, the starting rate, market expectations and the broader financial context.