A basis point is one hundredth of a percentage point — 0.01%. When an interest rate moves from 4.50% to 4.75%, that’s a change of 25 basis points. When a fund charges a fee of 0.15%, that’s 15 basis points.
The abbreviation is “bps,” often pronounced “bips.”
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Basis points dominate conversations about interest rates, bond yields, fund fees, and central bank decisions. Financial professionals use them instead of percentages to avoid ambiguity.
Consider this: if someone says a rate “increased by 1%,” do they mean it went from 5% to 6% (an increase of one percentage point) or from 5% to 5.05% (an increase of 1% of 5%)? Saying “the rate increased by 100 basis points” removes the confusion — it went from 5% to 6%.
Scale reference
- 1 basis point = 0.01%
- 25 basis points = 0.25%
- 50 basis points = 0.50%
- 100 basis points = 1.00%
On large amounts, small basis point changes matter. A 25-basis-point change on a $10 million loan changes the annual interest by $25,000.
Source: Federal Reserve — Financial Stability Report glossary