What is a Basis Point (BPS) and how is it calculated?
- Basis points are a measurement used in the financial industry to represent 0.01%.
- Using basis points instead of percentages reduces both mental math and general confusion.
- You can convert a percentage to basis points by multiplying it by 100, or convert basis points to a percentage by dividing them by 100.
What is a Basis Point (BPS)?
Basis points (bps) are a unit of measurement equal to 1/100th of a percent, or 0.01%. Used mainly in the financial industry, bps communicate small-scale movements in a way that is easy to communicate and understand.
Most often, basis points are used in conversations about changes to stocks, bonds, and interest rates. For large investments, even 1 basis point (0.01%) can represent a large amount of money.
Basis points are often represented with the abbreviation ‘bps” and pronounced as “bips” or “beeps.”
Basis points will often be used in conversations where the percentage change is less than 1% (100 basis points). Colloquially, some traders will use terms that build off of bps to express larger percentages. These include:
- MegaBips – 0.1% or 10 bps
- UltraBips – 1% or 100 bps
- GigaBips – 10% or 1000 bps
While you may encounter these terms occasionally, the only thing you really need to know is that a basis point represents 0.1%.
How are Basis Points Calculated?
1 basis point is 0.01%. We’ll explain the mathematical equation used to convert from one to the other in a moment, but the table below may be the easiest way to picture this relationship.
|10,000 basis points||100%|
|1,000 basis points||10%|
|100 basis points||1%|
|75 basis points||0.75%|
|50 basis points||0.5%|
|25 basis points||0.25%|
|10 basis points||0.1%|
|5 basis points||0.05%|
|1 basis point||0.01%|
If you have an unwieldy percentage, or amount of basis points, to calculate, you can use the equations below to convert from one to the other.
Equation to Convert Basis Points to Percentage
Basis Points ÷ 100 = Percentage
Example: An interest rate is set to rise by a 139 basis points. If we would rather express that number as a percentage, we can enter 139 basis points into our equation:
139 Basis Points ÷ 100 = 1.39%
This equation can also be done in your head by mentally moving the decimal point two places to the left (139.0 to 1.39).
Equation to Convert Percentage to Basis Points
Percentage x 100 = Basis Points
Example: A stock has fallen by 2.78%. By placing that number in the equation, we see:
2.78% x 100 = 278 Basis Points
This equation can also be done in your head by mentally moving the decimal point two places to the right (2.78 to 278.0).
Why Use Basis Points?
Conversationally, it’s easier to communicate about percentage change using bps. Using basis points instead of percentages reduces both mental math and general confusion.
For example, if a coworker says that an 8% interest rate rose by 2%, do they mean that the interest rate is now 10% or 8.16%? Additional clarification would be needed to understand the impact of their statement.
If instead they said that the 8% interest rate rose by 16 basis points, they’ve clearly communicated that the new interest rate is 8.16%, eliminating both mental math and your confusion.
Using basis points gives each hundredth of a percent (0.01%) the weight it deserves in financial conversations. Such small percentages would be inconsequential in other conversations. However, in conversation about stocks, bonds, yields, and interest rates, one basis point (0.01%) can represent hundreds, thousands, or millions of dollars.
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