What are Basis Points?

Basis Points (bps) are a standard unit of measurement for interest rates and other percentages in finance, equating to 1/100th of 1.0%. This term is frequently used in discussions about interest rate environments, such as those involving the Federal Reserve or bond and fixed-income securities.

Understanding Basis Points (bps)

How to Calculate Basis Points

One basis point is equal to one-hundredth of a percentage point, or numerically, 1/100th of 1.0%. In the finance industry, discussing interest rates in terms of basis points is common practice, especially for smaller figures. This practice reduces misinterpretations as basis points are absolute figures, making them easier to understand compared to small percentages.

Using basis points to describe interest rates, spreads, and yields is more precise because minor changes can significantly impact the economy or financial instruments. Basis points, pronounced as “bips,” are relevant in contexts involving government bonds, corporate bonds, and mortgage loans. Even a seemingly small difference, such as one basis point, can have substantial economic implications and affect yields considerably.

For example, interest rate adjustments by the central government (i.e., the Fed in the U.S.), even by one basis point, can cause significant effects on the bond and equities market, contrary to some expectations. Therefore, using basis points ensures clarity in communication.

How to Convert Basis Points to Percentage

In practice, basis points often signify percentage changes or yield spreads in financial instruments like fixed income, especially when the interest rate difference is less than one percent (<1.0%).

Basis Points Conversion Table:

Percentage (%)	Basis Points (bps)
0.01%	1
0.10%	10
0.25%	25
0.50%	50
1.00%	100
1.25%	125
1.50%	150
1.75%	175
2.00%	200
2.50%	250
3.00%	300
3.50%	350
4.00%	400
5.00%	500
10.00%	1,000

Basis Points Formula:

To convert the number of bps to a percentage figure, divide the bps by 100.

$\text{Percentage (\%)} = \frac{\text{Basis Points (bps)}}{100}$

Conversely, to convert a percentage into bps, multiply the percentage rate by 100.

$\text{Basis Points (bps)} = \text{Percentage (\%)} \times 100$

By expressing percentages as basis points, discussing incremental changes, such as the spread on bond yields, becomes easier, and the probability of misinterpretation is reduced.

Basis Points Calculator (bps)

Basis Point Calculation Example

Suppose we need to manually build a table converting percentages (%) to basis points (bps).

For instance, converting 0.01% to basis points:

$0.01\% \times 100 = 1 \text{ bps}$

We’re essentially moving the decimal in the percentage to the right by two places. Alternatively, we could divide the percentage by 0.01% to arrive at the same figure, which can be more convenient in Excel to avoid sign convention errors.

BPS to Percentage Conversion Example

Confirming that 100 bps equals 1.0%:

$100 \text{ bps} \div 100 = 1.0\%$

This completed conversion highlights the relationship between basis points and percentages, ensuring accuracy in financial calculations.

Disclaimer: This article provides general information and should not be considered as professional financial advice. Consult with a financial advisor or other professional to obtain advice tailored to your specific circumstances.