A basis point (sometimes searched as “base point”) is a unit equal to one-hundredth of one percentage point, or 0.01%. It’s the standard way finance professionals talk about small changes in interest rates, bond yields, and fees without any ambiguity. One basis point in decimal form is 0.0001.
Why Basis Points Exist
Percentages can get confusing when you’re talking about changes to something that’s already a percentage. If an interest rate moves from 4% to 5%, is that a 1% change or a 25% change? Both are technically correct depending on how you frame it. Basis points eliminate that confusion entirely. That same move is simply 100 basis points, and everyone knows exactly what it means.
The abbreviation you’ll see most often is “bps” (pronounced “bips”) or sometimes just “bp” for a single basis point.
How to Convert Basis Points
The math is straightforward. To turn basis points into a percentage, divide by 100. To turn a percentage into basis points, multiply by 100.
- 1 basis point = 0.01%
- 10 basis points = 0.10%
- 25 basis points = 0.25%
- 50 basis points = 0.50%
- 75 basis points = 0.75%
- 100 basis points = 1.00%
To find the basis point difference between two rates, subtract one from the other and multiply by 100. If a bond yield moves from 7.45% to 7.65%, that’s a difference of 0.20 percentage points, which equals 20 basis points.
Where You’ll See Basis Points Used
The most visible use is in central bank announcements. When the Federal Reserve raises interest rates by 25 basis points, that means borrowing costs went up by 0.25%. A larger move of 50 or 75 basis points signals a more aggressive policy shift, and financial markets react accordingly.
Bond markets rely heavily on basis points. If a corporate bond yields 4% and a comparable government bond yields 3%, the gap between them (called the credit spread) is 100 basis points. That spread tells investors how much extra return they’re getting for taking on the additional risk of lending to a company instead of the government. A bond that increases its yield by 50 basis points, say from 2.75% to 3.25%, has made a meaningful move that affects pricing across the market.
You’ll also encounter basis points in investment fund fees. A fund charging 20 bps in annual expenses costs you 0.20% of your invested balance per year. On a $100,000 portfolio, that’s $200. The difference between a fund charging 5 bps and one charging 75 bps might sound trivial, but over decades of compounding it can add up to tens of thousands of dollars.
Why Small Numbers Matter
Basis points feel tiny in isolation, but they move enormous amounts of money at scale. On a $300,000 mortgage, a rate increase of 25 basis points (from 6.50% to 6.75%) adds roughly $50 to your monthly payment and thousands over the life of the loan. In institutional finance, where billions of dollars change hands, even a single basis point shift can represent millions in gains or losses.
This is exactly why the unit exists. When the stakes are that high, saying “about half a percent” isn’t precise enough. Basis points give everyone involved a shared, unambiguous language for discussing changes that are small in percentage terms but massive in dollar terms.