Basis Points (BPS)

A basis point is a standard measure for interest rates and other percentages in finance, representing one-one hundredth of one percent. The "basis" in basis point comes from the base move between two percentages, or the spread between two interest rates. The basis point is commonly used for calculating changes in interest rates, equity indices, and fixed-income security yields. Basis points are also used when referring to the cost of mutual funds and exchange-traded funds.

The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points and 0.01% = 1 basis point.

For example, it could be said that the interest rate offered by your bank is 50 basis points higher than the London Interbank Offered Rate (LIBOR). A bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points, or interest rates that have risen 1% are said to have increased by 100 basis points. If the Federal Reserve Board raises the target interest rate by 25 basis points, it means that rates have risen by 0.25% percentage points. If rates were at 2.50%, and the Fed raised them by 0.25%, or 25 basis points, the new interest rate would be 2.75%.