What it is:
A basis point is one hundredth of one percent.
How it works (Example):
There are one hundred basis points in one percent.
Let's say Bank XYZ pays 2.54% interest on its savings accounts. A month later, it raises the rate to 2.75%. We would say that rate increased by 21 basis points.
Why it Matters:
Basis points are in anything that is expressed as a percentage: interest rates, rates of return, coupons, rates of change and much more. Because tiny changes can have big effects, it is no surprise that the markets are concerned about hundredths of a percent.