Understanding Basis Points: A Simple Guide

Changes in interest rates are often calculated using basis points.

A basis point is the smallest increment used to state bond yields or other interest rates. Put another way, a basis point is the smallest amount by which the rate can change. One basis point equals one hundredth of 1 percent. Finance professionals use basis points for clarity. For example, if you say an 8 percent rate rose by 2 percent, it's not clear if you mean the new rate is 8.16 percent or 10 percent. If you say the rate went up 16 basis points, the meaning is clear.

Basis Point Computations

Calculate the number of basis points in an interest rate by multiplying the percentage rate by 100. For example, an interest rate increase of 0.50 percent multiplied by 100 equals 50 basis points. If you want to go in the other direction and convert basis points to a percentage figure, divide the number of basis points by 100. Thus, 125 basis points divided by 100 equals 1.25 percent.