But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Basis points are commonly used when referring to changes in percentage values, such as the interest rates or yields of different bonds. They are also used in financial contracts, such as loans or mortgages, to define the interest rate charged.
In most cases, basis points refer to changes in interest rates and bond yields. This means that when the federal funds rate increases, the cost of borrowing (or, the amount of interest on any given loan) also increases. Conversely, when the federal funds rate decreases, the cost of borrowing typically also decreases. But, if you’re using basis points in this example, a 500-basis-point rise next month clearly means that the new interest rate next month will be 15 percent. Conversely, to convert percentages into basis points, you must multiply the percentage by 100.
Fluctuations in market variables such as equity prices, foreign exchange rates, and commodity prices can be measured in basis points. The precision of basis points allows for clear communication of even small changes in credit spreads, which is crucial for accurate market assessments. The price value of a basis point (PVBP) is a measure of the change in the absolute value of the price of a bond for a one basis point change in yield. This may also be referred to as DV01, or the dollar value change for a one bp move. It is another way to measure interest rate risk and is similar to duration, which measures the percent change in a bond price given a 1% change in rates.
If rates were at 2.50%, and the Fed raised them by 25 basis points, the new interest rate would be 2.75%. In 2022, the FOMC approved seven hikes in the federal funds rate, with each being 25, 50 or 75 basis points. When in doubt, some simple math can help convert basis points into percentages, and vice versa.
As we talked about in the last section about credit spreads, a widening of credit spreads indicates an increased perceived risk of default. The credit spread, measured in basis points, reflects the perceived credit risk of the bond issuer. Since interest rates don’t apply to equities, basis points are less commonly used as terminology for price quotes in the stock market. For example, it could be said that the interest rate offered by your bank is 50 basis points higher than the Secured Overnight Financing Rate (SOFR).
Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. This is the Fed’s benchmark interest rate, used to determine how much one bank pays another bank for overnight loans. If a lender informs you that the interest rate on a 30-year adjustable-rate mortgage (ARM) went up by 50 basis points, the rate might go from 5.50% to 6.00%. The easiest way to convert basis points into a percent form is to simply take the number of basis points and divide by 100. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
Basis points are essential in various financial instruments, including mortgage loans, common stocks and treasury bonds. The use of basis points is also common when discussing fixed-income security yields, equity indices and gross profit and operating margins. Additionally, bps can be used to express interchange fees, which are credit card processing fees.
As with the prime rate, SOFR can make a difference in how much you pay in interest for certain lending products. Although basis points are used primarily when referring to yields and interest rates, they may likewise refer to the percentage change in the value of an asset such as a stock. For example, an analyst may describe how a stock index rose 134 basis points throughout the trading day. Like percentage points, basis points avoid the ambiguity between relative and absolute discussions about interest rates by dealing only with the absolute change in numeric value of a rate. For example, if a report says there has been a “1% increase” from a 10% interest rate, this could refer to an increase either from 10% to 10.1% (relative, 1% of 10%), or from 10% to 11% (absolute, 1% plus 10%). However, if the report says there has been a “100 basis point increase” from a 10% interest rate, then the interest rate of 10% has increased by 1.00% (the absolute change) to an 11% rate.
Basis points are commonly used in reference to interest rates and bond yields. However, they can also be used to describe movement in percentage terms of various other things, including the value of a stock. To ascertain the number of basis points that a percent represents, multiply the percent by 100. In banking, basis points may be used to communicate the change in your annual percentage yield (APY), which is used to denote how much you earn on your deposit accounts such as certificates of deposit or savings accounts. But because the basis point is used to denote a change in interest rates — whether it’s rate changes for savings accounts or credit cards — it’s important to understand the concept behind this numeric notation.
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This calculation can also be done in reverse in order to ascertain the number of basis points that a percentage represents. For example, assume the rate on a bond has risen 2.42% and you want to know that in basis points. In the bond market, basis points are used when referring to the yields that fixed-income instruments pay investors. For example, if a bond yield spikes from 7.45% to 7.65%, it is said to have risen 20 basis points. To understand the practical usage of basis points, consider the following example. In May 2023, the Federal Open Market Committee (FOMC) increased the benchmark interest rate by 25 basis points, or 0.25 percentage points, to a range of 5% to 5.25%.
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While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. A basis point is a unit of measurement used to compare different percentages or ratios. It is calculated by multiplying the percentage by 100 and is often used to measure incremental changes in interest rates, yields and other financial instruments. Understanding how basis points work can help investors make more inventoriable costs informed decisions and better understand the implications of changes in financial markets.