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5 Min. Read

What Is BPS (Basis Points) In Finance? Definition & Calculation

What Is BPS (Basis Points) in Finance? Definition & Calculation

As a small business owner, you have a lot to worry about. One of the biggest things is your finance processes and some of the calculations that you can do. But if you’re not an accounting person or the best with numbers, it can sometimes feel overwhelming.

Finances don’t have to be a scary part of your business operations. What used to be time-consuming and tedious can now become efficient and streamlined. How? By understanding some of the units of measurement that get used.

These units of measurement make it easy to do your own calculations when you need to. Plus, they can allow you to better understand some of the details that go into your everyday accounting and finance processes.

BPS, or basis points, is a unit of measurement utilized to measure things like interest rates and other percentages in finance. But what exactly are basis points and how can you calculate them?

Here’s everything that you need to know.

Here’s What We’ll Cover:

What Are BPS (Basis Points) In Finance?

How to Calculate Basis Points

Key Takeaways

What Are BPS (Basis Points) In Finance?

Basis points typically get expressed using one of the following abbreviations: BPS, BP, or BIPS. They refer to a unit of measure that’s used to calculate interest rates and other types of percentages. Basically, one basis point is equal to 1/100th of 1%, which would turn out as 0.01%.

It’s used to help monitor and understand any percentage changes in your financials. The word “basis” comes from the difference between two interest rates. BPS is commonly used to calculate changes in equity indices, interest rates or fixed-income security yields.

The basis points also get used when looking at the cost of exchange-traded funds and the cost of mutual funds.

How Do They Work?

As mentioned above, “basis” is the move between two percentages or the difference between two interest rates. Since the changes get recorded narrowly, the basis ends up as a fraction of a per cent. This is also because small changes can sometimes have outsized outcomes.

Things like bonds and loans can commonly get quoted in basis point terms. For example, you could compare the interest rate at your bank being 50 basis points higher than the London Interbank Offered Rate (LIBOR). If you have a bond with a yield that increases from 5% to 5.5%, it is then said that it has increased by 50 basis points.

Or, if an interest rate rises by 1%, it’s said that it has then increased by 100 basis points. And even further, if the Federal Reserve Board raises the target interest rate by 25 bonus points, it means that interest rates will rise by 0.25%.

The Price Value of a Basis Point

When it comes to the Price Value of a Basis Point (PVBP), it’s determined by the measure of the absolute value of the change in price. And that’s the change in price for a bond on a one basis point change. It’s basically another way for you to measure any interest-rate risk.

Instead of using a 100 basis point change, a 1 basis point change gets used to determine the price value. In this case, it doesn’t matter if there’s an increase or decrease in interest rates since small changes will move the same in both directions. This could also get referred to as the dollar value change for a 1 bp move, or DV01.

How to Calculate Basis Points

Basis points can be most common for things like loans or bonds to help signify any percentage changes. It can also get used for yield spreads in financial instruments. And this is especially the case if there’s a less than one per cent difference on material interest rates.

Simply put, one basis point equals .01 per cent or 1/100th of 1 per cent. The points continue to move up gradually until they reach 100%, which would be equal to 10,000 basis points. Here's a quick chart to help break down the percentages a little bit easier.

Percentage

Basis Points

0.01%

1

0.1%

10

0.5%

50

1%

100

10%

1,000

100%

10,000

Let’s take a look at a few examples.

  • If one bond interest rate is at 9.50% and another is at 9.00%, then the difference would be equivalent to 50 bonus points
  • If The Federal Reserve announces that interest rates are going to rise by 100 BPS, it means that rates will increase from 11% to 12%
  • If Apple reported high earnings from the sale of iPhones, their stock could increase 3.3% or 330 BPS

To help you convert basis points into a percentage without using conversation templates or charts, you can do the following.

  • To turn basis points into a percentage, divide the points by 100
  • To turn percentages into basis points, multiply the percentage by 100

Key Takeaways

There are a few reasons why investors or analysts use the basic points system. One is to help describe any incremental changes to interest rates when it comes to interest rate reporting and securities. The other is to help avoid any ambiguity or confusion when talking about absolute and relative interest rates.

Basis points help to calculate interest rates and understand any changes when it comes to your financials. They can also commonly get used for things like fixed-income security yields and any changes in equity indices. The great thing is that the calculations are easy enough to do on your own.

To transform basis points into a percentage you simply divide the points by 100. If you wanted to turn the percentages into basis points, you would then multiply the percentage by 100. Keep in mind that one basis point is equal to 0.01%.

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