What Is a Basis Point? A Clear Guide for Investors

What Is a Basis Point?

A basis point, often abbreviated as "bps" and pronounced "bips," is a unit of measure equal to one one-hundredth of a percentage point, or 0.01%. Financial professionals use basis points to describe tiny movements in interest rates, bond yields, and fees without ambiguity. Understanding how basis points work can help investors interpret market news and calculate costs with confidence.

How Many Basis Points in a Percent?

Because one basis point equals 0.01%, there are 100 basis points in a single percentage point. For example, a change from 3.25% to 3.75% represents a movement of 50 basis points. Converting is simple: multiply the number of basis points by 0.01 to get the percentage change, or divide a percentage change by 0.01 to determine the equivalent in basis points.

Why Use Basis Points Instead of Percentages?

Small differences in percentages can become confusing. Saying that a rate rose "by 2%" could mean it increased from 2% to 4% (a 2-percentage-point rise) or that it climbed 2% of its original value. Using basis points removes this ambiguity. Stating that a yield increased by 25 bps clearly signals a 0.25-percentage-point move, leaving no room for misinterpretation.

Real-World Examples

Interest Rates

If the Federal Reserve cuts the federal funds rate by 75 basis points, the target range drops by 0.75 percentage points. Lenders may pass on that 0.75% reduction to adjustable-rate mortgages and credit cards, lowering borrowing costs for consumers.

Portfolio Fees

An expense ratio of 40 bps means investors pay 0.40% annually. On a $100,000 portfolio, that equals $400 each year. Knowing the fee in basis points helps investors compare funds quickly and spot seemingly minor differences that add up over time.

Key Takeaways

• One basis point equals 0.01% (1/100th of a percent).
• Basis points prevent confusion when discussing small rate or fee changes.
• Mastering bps calculations empowers investors to grasp interest rate shifts, bond pricing, and fund expenses with accuracy.