Basis Point

Finance often deals with small changes in percentages, and words like "a quarter of a percent" can be confusing. Basis points remove the confusion: 1 basis point is 0.01%, 25 basis points is 0.25% and 100 basis points is 1%.

For example, if a central bank raises its policy rate from 4.25% to 4.50%, commentators say it raised rates by 25 basis points. On a loan of 200,000, an extra 25 basis points of interest adds about 500 a year in interest costs.

Basis points are also used for fees and spreads. A fund charging 0.15% a year is said to charge 15 basis points, and a corporate bond yielding 1.8 percentage points more than a government bond has a spread of 180 basis points.

The term avoids a common ambiguity. If a rate of 4% rises by "1 percent", it is unclear whether it is now 5% or 4.04%. Saying it rose by 100 basis points makes clear that the new rate is 5%. Basis points are often written "bps" and pronounced "bips".