Basis Point (BPS)

What Is a Basis Point (BPS)?

A basis point is a unit of measure equal to one hundredth of one percentage point, or 0.01%. It is written as "bp" in the singular and "bps" in the plural. In finance, it is most often used to describe small movements in interest rate levels, bond yield values, and credit spread differences. Many of these moves are too small to describe comfortably in whole percentages, so the basis point gives investors a precise, shared way to talk about them.

The conversion is simple. One percentage point equals 100 basis points, so a 0.25% change is 25 basis points.

Basis points = percentage change × 100

How Basis Points Are Used

Suppose a bond's yield rises from 4.00% to 4.25%. The increase is 0.25 percentage points, which is 25 basis points. Saying "the yield rose 25 basis points" avoids the confusion that can come from saying "rose a quarter of a percent," since that phrase could be read as a relative change.

That ambiguity is the main reason the unit exists. A move from 4% to 5% is a 1 percentage point change, but it is also a 25% relative increase. Basis points always refer to the absolute difference between two percentages, not the proportional change.

Basis points also appear in fees. A fund with an expense ratio of 0.50% per year is often described as charging 50 basis points annually.

Why It Matters to Investors

Understanding basis points helps investors read financial news and product documents accurately. Central bank decisions, mortgage rate changes, and changes in fund costs are frequently reported in basis points, so a small-sounding number can represent a meaningful shift in borrowing costs or investment returns. Over long periods, even a difference of a few basis points in annual fees can add up to a noticeable difference in total returns.

Basis points are a measurement tool rather than an investment, so they carry no risk on their own. Their value lies in precision: they let people describe very small changes clearly and consistently.