Updated on March 13, 2023
‘Basis points’ or a ‘Basis point’ is a common unit of measurement for interest rates and other percentages in finance, banking and stock markets. It is the smallest unit of measurement used frequently in finance, accounting and the banking sector for amounts which are less than one percent. One basis point is written as ‘bps’ and is equal to 1/100 of one percent, or 0.01%. Thus, one basis point is equal to 1/100th of 1%, or 0.01% or 0.0001 and is used to represent the percentage change in a Financial Instrument.
Importance of Basis Points
A Basis point is a small measure but it can have a big impact on the industry or economy, because of the volumes under consideration. For instance, interest rates moving up by even a few basis points can translate to huge amounts impacting bank rates, lending and deposit rates.
Calculation of Basis Points
It can be calculated by multiplying the percentage by 100:
Basis points = Percentage x 100
Percentage = Basis points/100
Uses of Basis Points
Uses of Basis Points are:
1. It is used by the Central banks while changing base rates like repo rate, reverse repo rate etc.
2. For denoting the interest rate spread or difference between two interest rates.
3. For expressing the expense ratio of Mutual Funds, ETFs etc.