Basis point

Before you rely on it

What to check

When a change is quoted in points, confirm which kind of point.

The common error

Where people go wrong with basis point

Hearing 'we raised it fifty points' and reading it as fifty percent. The gap between those two readings is a factor of a hundred, and it has ended up in contracts.

Worked through

Basis point in plain numbers

A Treasury yield moves from 4.25% to 4.60%. That is 0.35 percentage points, or 35 basis points. Saying 35 basis points avoids the ambiguity of saying it rose 0.35%, which could be a 0.35% relative change. Put a price on it. A lender charges 25 basis points more on a $1,000,000 loan and collects an extra $2,500 a year; a bond fund with a duration of 5 loses about 1.75% if yields rise 35 basis points. Traders talk in these units because the moves that matter are usually small and the arithmetic stays clean.

Easily confused

Basis point and its neighbours

A basis point is not a percent and not a percentage point. One percent is 100 basis points. One percentage point is also 100 basis points. But a 1% change in a 5% rate is a relative change of 0.05 percentage points, or 5 basis points. That is the confusion the unit exists to prevent; the word pip plays a similar role in currency trading, but it is tied to a specific decimal place of an exchange rate; a basis point always means 0.01 percentage point, whatever the market.

In real decisions

Where basis point turns up

Rates, fees and spreads are quoted in basis points. Mortgage brokers describe a rate change as an eighth of a point, or 12.5 basis points. Fund fees appear as 25 or 60 basis points instead of 0.25% and 0.60%. Central banks announce moves of 25 or 50 basis points. Credit spreads over a benchmark are read the same way; a 40 basis point gap between two bonds is worth understanding in dollars: on a $500,000 holding, it is $2,000 a year.

Know the edges

Where basis point stops being reliable

The unit tells you size, not significance. Ten basis points on a short-term deposit is a tiny amount, while ten on a long, risky bond can be a large repricing; small numbers can hide big effects when they apply to large balances or long periods. Compounding also matters: a fee of 50 basis points looks trivial but can remove a meaningful share of returns over decades. Always convert to dollars over the period you care about.

Quick answers

What people ask about basis point

How many basis points are in one percent? One hundred. So 0.25% is 25 basis points, and a rise from 4.00% to 4.75% is 75 basis points.

Why do lenders and traders use basis points? They avoid ambiguity. Saying a rate rose 1% could mean one percentage point or one percent of the rate. Saying it rose 100 basis points is exact. Small moves also read more cleanly.