Basis Point (BPS)

A basis point is a common unit of measure for interest rates and other financial percentages, where one basis point is equivalent to one hundredth of one percent, or 0.01%. It is used primarily in the finance industry to describe the amount of change in interest rates or other financial percentages where differences are typically less than one percent.

Expressing financial changes in basis points effectively eliminates ambiguity and enhances clarity, especially when dealing with small changes that could have significant implications. For example, a change in an interest rate from 2.5% to 3.0% is described as a 50 basis points increase. Similarly, in terms of transaction fees or interchange rates, differences are often quantified in basis points to precisely communicate costs or adjustments. For instance, a fee rate of 2.5% would be expressed as 250 basis points.

Using basis points allows financial professionals to discuss and compare small increments with precision, which is crucial for accurate reporting, financial analysis, and strategic decision-making in banking, investing, and loan management.