Basis Point (bp): Understanding Interest Rate Fluctuations

A Basis Point, often referred to as a Beep (using the notation bp), is a measurement of one-hundredth of a percent or one ten-thousandth and is a term commonly used in financeFinance OverviewFinance is defined as the providing of funding and management of money for individuals, businesses, and governments. The financial system includes the circulation of money, managing of investments, and lending of funds. In businesses, the finance team is responsible for ensuring the company has enough capital, and that the company's revenues and expenses are well managed.. Basis points are commonly used in situations where differences of less than 1% are noteworthy. This is most often found to be true in fixed income marketsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period..

Beeps in Relation to Interest Rates

Because the basis point is a convenient metric when discussing percentage changes that fall below 1%, it consistently comes up when talking about interest ratesInterest RateAn interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal.. While not always true, yearly changes in interest rates that don’t exceed a 1% difference are still typically meaningful for investors.

For example, consider that an interest rate of 3.50% climbs 0.10% for the year. It means that the interest rate increased by 10 basis points, leaving it at 3.60% at the end of the year. If, however, reports indicate that the same interest rate climbed 100 basis beeps for the year, it would mean a full percentage change, making the interest rate 4.50% by the end of the year.

Common Uses of a Basis Point

The term basis point stems from trading the “basis” – the spread – between two interest rates. The basis (or spread) is generally small, leading it to be quoted in multiples of 10,000.

Specific loans and bonds are typically quoted using a relationship to an index or an underlying securityPublic SecuritiesPublic securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based. or asset. In such cases, when the loan or bond is quoted in relation to a particular index, interest rates are quoted as a spread, either over or under the index. For example, consider that a bond with a yearly interest rate that is 0.25% higher than the London Interbank Offered Rate (LIBOR)LIBORLIBOR, which is an acronym of London Interbank Offer Rate, refers to the interest rate that UK banks charge other financial institutions for, which is among the most common benchmark interest rate indices. This means the basis or spread is indicated as 25 beeps over LIBOR.

When talking about forward forex markets, the basis point can be compared and contrasted with the point in percentage (pip).

Why is the Basis Point Important?

Aside from being able to calculate small percentage changes, as mentioned above, understanding and referencing basis points is also important because it helps remove ambiguity, especially when talking about interest rates and how they change. If an interest rate rises by 50 beeps, it rises by 0.50%.

The basis point is a very useful metric used to remove uncertainty when discussing rate changes and to identify and keep track of fractions of percentage changes.

Additional Resources

Thank you for reading this guide to understanding what a beep is in finance. CFI is the official provider of the global Financial Modeling & Valuation AnalystBecome a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. See the following CFI resources for more information:

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