Takeaways
- A basis point is 1/100 of a percent and describes changes in interest rates.
- Basis point decreases in annual percentage rates can improve borrowing costs.
- News and media coverage discuss changes in interest rates using basis points.
- Increasing basis points in annual percentage yield (APY) boosts interest income.
- Investors, traders, and money managers use basis points to communicate changing interest rates.
Slight differences in percentage points can have a significant impact when evaluating interest rates, investment returns, or comparing financial products like bonds, CDs, and savings accounts. That is where understanding how a basis point, a precise unit of measurement, works comes into play. In finance, basis points provide an exact way to describe changes in interest rates or yields, especially when those changes are seemingly small, or less than 1%.
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What Are Basis Points?
A basis point, often abbreviated as “bps” and pronounced “bips,” equals one-hundredth of a percentage point.[1] Here’s what that means in numerical terms:
- 1 basis point = 0.01%
- 10 basis points = 0.10%
- 100 basis points = 1.00%
Investors, lenders, and other financial professionals use the term “basis points” to eliminate confusion when discussing changing interest rates. Small ebbs in your annual percentage rate (APR) can increase the cost of borrowing money. Alternatively, adjusting to your annual percentage yield (APY) can change how much interest income you earn. Discussing basis points provides absolute clarity, particularly in complex financial discussions where fractions of a percent can have a dramatic effect.
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How Basis Points Work
Finance professionals use basis points primarily to describe rate changes, fees, or returns. Here are a few common examples to illustrate how they work: from credit card interest rates to mortgage rates and from stock market returns to mutual fund fees, basis points are a versatile tool in the financial world.
- The Federal Reserve increases the federal funds rate by 25 basis points at the next FOMC meeting, from 4.50% to 4.75%
- If a bank increases the annual interest rate on a savings account from 3.00% to 3.50%, the rate has increased by 50 basis points.
- If a bond yield drops from 2.75% to 2.65%, it has decreased by 10 basis points.
- A financial advisor fee of 1.25% may also be described as 125 basis points.
How to Calculate Basis Points
To convert basis points to a percentage or vice versa, you can use the following simple formulas:
To Convert Basis Points to Percentage:
Divide the number of basis points by 100.
- Example: 75 basis points = 75 ÷ 100 = 0.75%
To Convert Percentage to Basis Points:
Multiply the percentage by 100.
- Example: 1.50% = 1.50 × 100 = 150 basis points
This conversion makes it easier to communicate minor differences in rates accurately. In industries where even a 0.01% change can have significant consequences, such as bond investing or mortgage lending, basis points are the preferred terminology.
When Are Basis Points Important?
Basis points play a crucial role in investment decisions and savings products. Here are several areas where understanding basis points is especially useful:
- Certificates of Deposit (CDs) - The difference is often seemingly negligible when comparing certificate of deposit (CD) rates between banks. A CD offering 4.50% APY versus another offering 4.65% APY may appear nearly identical. Still, that 15-basis-point difference can result in a noticeable increase in interest income, especially with large deposits (jumbo CDs), longer-term CDs, or when building a CD ladder.
- Bonds - In the bond market, there are many types of bonds, but yields and prices are commonly measured in basis points. Since bond prices move inversely to interest rates, even a 10-basis-point change in yield can significantly impact a bond’s value. A difference of 25 to 50 basis points in yield in fixed income investing may mean the difference between underperforming or beating an institutional investor’s benchmark.
- High-Yield Savings Accounts - With interest rates on high-yield savings accounts fluctuating regularly, basis points allow you to compare offers accurately. For example, the basis point spread between the highest and lowest APY offered could be 115 basis points. Over time, that 115-basis-point difference makes a massive difference for your investment portfolio. This can translate into hundreds of dollars over time, thanks to the power of compound interest.
- Checking Accounts - While traditional checking accounts rarely offer significant interest, some reward checking accounts or high-interest checking products do. When they do, rates may differ by just a few basis points, which can still affect your long-term interest income and impact where you decide to keep substantial savings balances, like your emergency fund.
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Why Use Basis Points Instead of Percentages?
The primary reason professionals use basis points is to avoid ambiguity. For example, if an analyst says a loan’s interest rate “increased by 1%,” it is not immediately clear whether that means:
The rate went up by 1 percentage point (e.g., from 5% to 6%);
Or it increased by 1% of the current rate (e.g., 5% × 1% = 5.05%)
Using basis points when discussing interest rate changes eliminates this confusion. Saying the rate increased by 100 basis points means a full percentage point increase. Stock traders, mortgage underwriters, and news coverage need clarity when communicating and dealing with large amounts of money, where a few basis points can mean thousands or millions of dollars in gains or losses.
Smart Summary
Basis points are a precise unit of measurement used in finance to describe changes in interest rates, yields, and fees. One basis point equals 0.01%, and 100 basis points equal 1.00%. Financial media, investment professionals, and money managers use basis points for clarity when discussing changing interest rates. Understanding basis points can help you manage your investment portfolio and communicate easily with your investment advisor.
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(1) Corporate Finance Institute. Basis Points (BPS). Last Accessed May 20, 2025.
