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Basis Points Explained

Beginner

“Basis Points” (often shortened to “bps”) are a term used by financial market participants and institutions to express the change in value or interest rate of financial instruments.

They are used to standardise changes in the value of financial instruments that are priced in percentages. Instruments such as interest rates or bond yields move in basis points. This helps to remove some of the ambiguity that would arise from a change in percentages.

How are Basis Points expressed? 

Basis Points are a standard measure. One basis point is calculated as being equal to 1/100th of 1% in percentage terms. This can also be expressed as 0.0001 in decimal form (calculated as 0.01/100).

  • 1 basis point (bps) = 0.01% or 0.0001
  • 5bps = 0.05% or 0.0005
  • 10bps = 0.10% or 0.0010
  • 25bps = 0.25% or 0.0025
  • 50bps = 0.50% or 0.0050
  • 100bps = 1.00% or 0.0100
  • 200bps = 2.00% or 0.0200
  • 500bps = 5.00% or 0.0500
  • 1000bps = 10.00% or 0.1000

Using Basis Points

Basis Points can be used to express changes in central bank interest rates:

  • “The US Federal Reserve has increased the Fed Funds interest rate by half a per cent from 2.00%. It has increased the rate by 50 basis points to 2.50%.”

They can also be used to reflect changes to bond yields:

  • “The UK 10-year Gilt yield has increased by 12 basis points from 1.38% to 1.50%.”

Why use Basis Points?

When discussing percentages, levels can sometimes be confusing. Basis points are used to remove some of the ambiguity.

If a financial instrument is priced at 5% and increases by 10% there is confusion as to the level of the new value. The new price could be 15% (5% +10%) or it could be 5.5% (0.05 x (1+0.10)).

Using basis points helps to clarify and standardise the change. The instrument priced at 5% increases by 50 basis points to 5.5%. It would take an increase of 1000 basis points for the instrument to increase from 5% to 15%.

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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