Written byA basis point (bps) is a unit equal to one hundredth of a percentage point, used to express small changes in interest rates, yields, fees and spreads.
Also known as: bps, bp, basis points
Key points
- One basis point is 0.01%, so 25 basis points are 0.25% and 100 basis points are a full percentage point.
- Markets quote rate moves, bond yields, credit spreads and fund fees in basis points because small decimals are easy to misread.
- Cash-rate decisions and changes to a lender's margin are announced in basis points and flow through to variable rate loans.
- Divide basis points by 100 for a percentage and by 10,000 for a decimal: 37 bps is 0.37%, or 0.0037.
Why finance uses basis points
Small rate moves are easy to misread when written as percentages. "25 bps" is unambiguous, whereas "0.25%" can be misheard as 0.025. Basis points also capture the fine detail that matters in markets: bond yields, credit spreads and fund fees often move by single-digit basis points, and a percentage with three decimal places is clumsy to say and easy to round badly.
The convention is consistent across bonds, swaps and loans, so borrowers, lenders and traders share a common language. If you are comparing central bank decisions or bond yields, basis points make the comparison straightforward.
How to convert basis points
The core relationships are worth memorising. One basis point is 0.01%, or 0.0001 as a decimal. Ten basis points are 0.10%, 25 basis points are 0.25%, 50 basis points are 0.50% and 100 basis points are one full percentage point.
To turn basis points into a percentage, divide by 100; to go the other way, multiply by 100. To get a decimal for a formula or spreadsheet, divide basis points by 10,000 (in Excel, =A2/10000). So 37 basis points is 0.37%, or 0.0037 as a decimal, and 0.45% is 45 basis points. A quick mental trick is to move the decimal point two places left to go from basis points to a percentage, and two places right to go back.
Always check whether a figure is in basis points, percent or decimal before you use it in a calculation, and keep full precision until the final result.
Where you will see basis points
Cash-rate decisions are the most familiar use. A headline like "RBA hikes by 25 bps" describes a move of 0.25 of a percentage point, which lenders pass through to home loan and business loan rates. Lenders also announce changes to their own margins in basis points.
In bond markets, yield changes are quoted in basis points, and corporate credit spreads over government yields are expressed the same way, for example a 120 bps spread. Fund management fees and expense ratios are commonly quoted in basis points too, so a 75 bps fee is 0.75% a year. Swap rates are quoted in basis points as well, where small moves can mean large gains or losses on leveraged positions.
Bond investors measure interest rate risk with the price value of a basis point (PVBP, also called DV01): the approximate dollar change in a bond's price for a one basis point move in yield.
Example
A managed fund quotes its management fee as 50 basis points. Converting it: 50 divided by 100 is 0.50% a year, or 0.005 as a decimal. On $100,000 invested, the fee is 0.005 × 100,000, which is $500 a year. The same arithmetic works for a loan: if a lender lifts a variable rate by 15 basis points, the rate rises by 0.15 of a percentage point. How much the monthly repayment changes depends on the balance, the remaining term and the amortisation schedule, so a loan calculator gives the exact figure.
Not to be confused with
- Spread (finance)
- a spread is the gap between two rates, usually quoted in basis points; the basis point is the unit, not the gap
- Margin
- a margin is the amount a lender adds on top of a base or funding rate; basis points are simply the unit it is measured in
Frequently asked questions
Is 100 basis points the same as 1%?
Yes. 100 basis points equal one percentage point, so 50 basis points are 0.50%, 25 basis points are 0.25% and a single basis point is 0.01%. The abbreviation is bp for one basis point and bps for more than one.
How do you convert basis points to a percentage?
Divide the number of basis points by 100, or simply move the decimal point two places to the left: 25 bps becomes 0.25%. To convert a percentage to basis points, multiply by 100, so 0.35% is 35 bps. For a decimal, divide basis points by 10,000, so 25 bps is 0.0025.
How does a 25 basis point rate rise affect my mortgage?
A 25 basis point increase lifts your interest rate by 0.25 of a percentage point. The effect on your monthly repayment depends on your balance, the remaining term and how the loan amortises, so use a loan calculator with your own figures to see the exact change.
What is the price value of a basis point (PVBP)?
PVBP, also called DV01, is the approximate dollar change in a bond's price for a one basis point move in yield. A common approximation is modified duration multiplied by notional multiplied by 0.0001. On a $1,000,000 bond with a modified duration of 7, that is about $700 per basis point. Traders use it to measure and hedge interest rate exposure.
Can fees be quoted in basis points?
Yes. Fund management fees and expense ratios are commonly quoted in basis points because it states a small percentage charge clearly. A 75 bps fee is 0.75% a year, and a 50 bps fee on $100,000 works out to $500 a year. Always check whether a quoted figure is in basis points, percent or decimal.
Related terms
Interest
Interest is the price of using money: what a borrower pays on a loan, or a saver earns on a deposit, expressed as a percentage rate on the principal.
Read definitionRate
A rate is a ratio or charge expressed against a unit, commonly per year, that measures cost, return or proportion; in finance it usually means an interest rate.
Read definitionSpread (finance)
A spread is the difference between two related rates or prices, such as a lender's rate and its benchmark, or an asset's buy and sell price.
Read definitionMargin
Margin is the share of each revenue dollar left after costs, what a lender adds to its base rate, or your own equity in a geared share portfolio.
Read definitionVariable rate
A variable rate is an interest rate that can move up or down over the life of a loan, following the lender's benchmark and its margin.
Read definitionFixed rate
A fixed rate is an interest rate locked in for a set term, so the rate and usually the repayments do not change until that term ends.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.