A basis point -- often abbreviated as 'bps' or pronounced 'bip' -- is a unit of measure equal to one one-hundredth of a single percentage point. In decimal terms, 1 basis point equals 0.01% (0.0001). Conversely, 100 basis points equal exactly 1.00% (0.01).
Financial markets rely on basis points to eliminate ambiguity when discussing relative versus absolute percentage shifts. For instance, if an interest rate of 5.0% is reported to increase by '0.5%', it could mean an absolute rise to 5.5% or a relative rise of 0.5% of 5.0% (rising to 5.025%). Stating that the rate increased by '50 basis points' explicitly specifies an absolute movement from 5.00% to 5.50%.
Conversion table and loan pricing math
Converting between basis points, percentages, and decimals follows a simple multiplier: 1 bps = 0.01% = 0.0001; 25 bps = 0.25% = 0.0025; 50 bps = 0.50% = 0.0050; 75 bps = 0.75% = 0.0075; and 100 bps = 1.00% = 0.0100. Central banks like the Federal Reserve typically change benchmark interest rates in increments of 25 or 50 basis points.
Small changes in basis points generate significant financial consequences on large loan balances. On a $500,000 30-year fixed mortgage, a 25 basis point rate increase from 6.50% to 6.75% increases the monthly principal and interest payment from $3,160.34 to $3,242.71. That 25 bps shift adds $82.37 to your monthly outlay, accumulating to $29,653.20 in total additional interest payments over the life of the loan.
Expense ratios, credit spreads, and yield curves
Basis points are also the standard unit for investment management expense ratios. An index ETF with an expense ratio of 3 basis points charges $3.00 annually for every $10,000 invested. By comparison, an actively managed mutual fund charging 85 basis points incurs an annual fee of $85.00 per $10,000 invested. Over a 30-year period, that 82 bps fee difference can reduce overall portfolio accumulation by tens of thousands of dollars.
In fixed income, credit spreads are expressed in basis points above benchmark government bonds. If a 10-year Treasury yields 4.25% and a corporate bond yields 5.65%, the corporate bond spread is 140 basis points. Using a percentage calculator helps quickly convert basis points into absolute currency values across different portfolio amounts.