Basis points (often abbreviated as "bps" and pronounced as "bips") are a unit of measurement used in finance to describe changes in interest rates, corporate bonds, and other financial percentages.
One basis point is equal to 0.01% (1/100th of a percentage point) or 0.0001 in decimal form. For instance, a change from 2.50% to 2.75% represents a 25-basis-point increase.
As mentioned, these units of measurement are commonly used in discussions about financial metrics and within the investment community to eliminate ambiguity and ensure precision within financial calculations.
Instead of saying "a 0.25% increase," many financial professionals prefer "a 25 basis point increase" to avoid confusion, especially when working with large sums or complex calculations.
Basis points are particularly important in fixed-income markets, loan agreements, and monetary policy discussions, where even small percentage changes can have significant financial implications. By standardising fractional percentage changes with a universal measurement, clarity can be greatly improved in financial decisions and communications.
The easiest way to convert a percentage to basis points is to use our above basis point calculator.
However, converting percentages to basis points is a straightforward process once you understand that one bps equals 0.01% or 0.0001 in decimal form.
For example, to convert 2.5% to basis points, multiply 2.5 by 100: 2.5 × 100 = 250 bps
This means a 2.5% change is equivalent to 250 basis points.
Basis points are crucial in financial contexts because they provide a precise and universally understood unit of measure used to communicate small changes in percentages, especially in areas like bond yields, investment fees, and when dealing with large sums or complex financial instruments.
Even minor percentage shifts can have significant financial consequences, particularly when dealing with large sums or complex instruments. For example, a 10-basis-point change in the interest rate on a multi-million-dollar loan can result in substantial cost differences.
Using basis points also eliminates ambiguity that can arise when discussing percentage changes. For instance, saying "a 1% increase" could be interpreted differently depending on the context—does it mean an absolute increase of 1% or a 1% relative increase? Instead, with an increase in basis points, this potential confusion is avoided.
The usage of basis points is essential for clear communication among financial professionals, ensuring accuracy in reporting and decision-making in markets where precision is vital.
As we've established, basis points provide a precise way to measure and communicate small changes in interest rates or fees associated with loans, therefore they also play a key role in mortgage loans.
Lenders and borrowers use them to understand how rate adjustments can affect overall borrowing costs. For instance, if mortgage rates changed from 5.00% to 5.25%, the change is 25 bps.
Even small basis point changes can significantly impact long-term mortgage costs. For example, on a £300,000 loan, an increase of 25 bps translates to higher monthly payments and increased total interest over the loan term.
1% is equal to 100 basis points.
50 bps represent 0.50% or half a percentage point.
75 bps represent 0.75% or three-quarters of a percentage point.
