Basis points, also known as BPS, are the changes in financial percentages as represented by a common unit of measurement.
Put simply, the relationship between percentages can be read as follows:
1% change = 100 basis points
0.01% = 1 basis point.
When discussed in relation to a change in interest rate, the term ‘basis point’ is used. For instance, someone may say that “this is the basis point difference between the interest rate of two bonds”. By using BPS over percentages, it eliminates any confusion that may arise when discussing changes or differences.
Example: If an interest rate is currently at 20%, and it is believed to rise by 10%, without further information, it would be difficult to say whether the new total is 30% or 22%.
However, if an interest rate is at 20% and it will increase by 1,000 basis points, it is certain that the new total is 30%. If the interest rate increases by 200 BPS, the answer would be 22%. Therefore, BPS makes understanding percentages much easier.
Other key basis point figures:
1 BP = 0.01%
10 BPS = 0.1%
100 BPS = 1%
1,000 BPS = 10%
10,000 BPS = 100%
Basis point is can be abbreviated to ‘BP’, ‘BPS’, or ‘BIPS’.