Basis point definition
Basis point
Basis points, also known as bps (pronounced ‘bips’), describe the percentage change in the value of financial instruments or the rate change in an index or other benchmark. Basis points mostly refer to changes in interest rates and bond yields. One basis point is equivalent to 0.01%.
Understanding BPS
Using basis points as a metric for describing small changes in prices is often more efficient than relying on percentage points. For example, a bond whose yield increases from 5% to 5.05% is said to increase by five basis points; interest rates that have risen 0.2% are said to have increased by 20 basis points.
Basis points help to eliminate ambiguity from phrases such as ‘the bond's yield was 10% before rising 5%’. Is the 5% an absolute measure or 5% of the 10%? Describing the rise as 50 basis points (for a new yield of 10.5%) or 500 basis points (for a new yield of 15%) eliminates this uncertainty.