What is a basis point?
Basis points, known as BPS, are a common unit of measurement for changes in financial percentages. A 0.01% change is the same as 1 basis point. A rather large 100% change is the same as 10,000 BPS.
Where have you heard about a basis point?
You hear about basis points a lot whenever any changes in interest rates are being discussed. For example, you might hear about the basis point difference between the interest rate of two bonds or loans. By using BPS over percentages, it stops any confusion when talking about changes or differences.
What you need to know about basis points...
If an interest rate is currently at 20%, and it is said to rise by 10%, is the new total 30% or 22%? Without clarification, it could be either.
But if you're told an interest rate is at 20% and it will increase by 1,000 basis points, you know for certain that the new total is 30%. And if it was increasing by 200 BPS, it would be 22%. Basis points make understanding percentage changes a whole lot simpler.
Here's a basic run-through of key basis point figures to always keep in mind:
- 1 BP = 0.01%
- 10 BPS = 0.1%
- 100 BPS = 1%
- 1,000 BPS = 10%
- 10,000 BPS = 100%