What are Basis Points (bps)?
A basis point is the smallest measure used in quoting yields on fixed income products. Basis points also pertain to interest rates. One basis point is equal to one one-hundredth of one percentage point (0.01%). Therefore, 100 basis points would be equivalent to 1%.
How Do Basis Points (bps) Work?
An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%. The difference between 12.83% and 12.88% is five basis points.
When you read a headline such as "The Federal Reserve cut interest rates by 25 basis points," this means that Fed lowered rates by 0.25%. In finance, basis points are often written as "bps" and prounounced "beeps" or simply "points."
Why Do Basis Points (bps) Matter?
The term basis points avoids the ambiguity in discussions about rates. Confusion could arise in a statement such as, "a 1% increase from a 10% interest rate." The 1% increase could be interpretted as either an increase from 10% to 10.1% (relative) or 10% to 11% (absolute).
Using basis points clarifies the amount in question. The statement, "... a 100 basis point increase" would signal that the rate has increased from 10% to 11%.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
When aviator, film producer and engineer Howard Hughes died in 1976, no will was found. Suddenly, a gas station attendant named Melvin Dummar arrived on the scene waving a handwritten will....Read More →