Basis Point (bps)
Definition
A unit of measurement equal to 1/100th of a percentage point (0.01%), commonly used in finance to describe changes in interest rates, bond yields, and fund expense ratios.
A basis point (abbreviated "bps" and pronounced "bips") equals 0.01%. So 100 basis points = 1%, 50 basis points = 0.50%, and 25 basis points = 0.25%. This unit exists because percentage changes of percentages can be confusing without it.
For example, if a mortgage rate moves from 6.50% to 6.75%, that's a 25 basis point increase. Saying "it went up 0.25%" is ambiguous — does that mean 0.25 percentage points or 0.25% of 6.50%? Basis points eliminate this confusion.
Basis points matter most in three areas: Federal Reserve interest rate decisions (the Fed typically moves in 25 or 50 bps increments), bond yields (where small changes in yield significantly impact bond prices), and investment fund expense ratios (where the difference between 5 bps and 50 bps compounds enormously over decades).
On a $500,000 investment portfolio, a 50 basis point difference in annual fees means $2,500 per year — and over 30 years with compounding, that fee difference can cost over $150,000 in lost returns. This is why low-cost index funds (typically 3-10 bps) are so much more efficient than actively managed funds (typically 50-150 bps).
Where this appears in Clarity
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Related Terms
Frequently Asked Questions
How many basis points are in 1 percent?
100 basis points equal 1 percentage point. So 50 bps = 0.50%, 25 bps = 0.25%, 1 bp = 0.01%. The Federal Reserve's typical rate adjustment is 25 basis points.
Why do we use basis points instead of percentages?
Basis points eliminate ambiguity. If a rate goes from 5% to 5.25%, saying 'it increased by 25 basis points' is clearer than 'it increased by 0.25%' (which could mean 0.25 percentage points or 0.25% of 5%, which would be 0.0125%).