BPS: Basis Points

Why do basis points matter and how do you use them?

What are basis points? 

Basis points (bps or bips) are a unit of measure used in finance to describe percentage change in value. One basis point is equivalent to 0.01% (1/100th of a percent). Basis points are especially useful when describing a difference in value that is less than one percent.

Why use basis points? 

Basis points are used to avoid ambiguity and confusion. For example, let's say that the unemployment rate in 2018 was 5% and by 2019 this value had changed to 15%. If you say that the value has increased by 10%, it is not clear whether you mean that it changed from 5% to 5.5% (a relative value) or from 5% to 15% (an absolute value). To avoid this confusion, you can say that it has increased by 1000 BPS. In this way, basis points help to eliminate ambiguity when talking about percent changes in value.

Converting basis points to percentages 

The easiest way to convert basis points into a percent form is to take the number of basis points and multiply by 0.0001. For example, if you wish to convert 250 basis points into a percent, simply multiply 250 by 0.0001. This will give you 0.025, which is 2.5%.

Basis Points Translator

Because rate quotes generally move in increments of one-eighth, here is a quick reference guide to translate basis points.

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