What You Need To Know About The Term “Basis Point”

In Finance, a basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
100 Basis points = 1 percentage point.
Why Basis Points are important:
It is typically used to:
  • Express differences in interest rates of less than 1%per year.
  • Avoid ambiguities between relative and absolute changes in interest rates.
An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%. The difference between 12.83% and 12.88% is five basis points.
When you read a headline such as “The Central Bank of Nigeria cut interest rates by 25 basis points,” this means that the CBN lowered rates by 0.25%. In finance, basis points are often written as “bps” and pronounced “beeps” or simply “points.”
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%). If, however, the report says there has been a “10 basis point increase” from a 10% interest rate, then we know that the interest rate of 10% has increased by 0.10% (the absolute change) to a 10.1% rate.

SHARE
Previous articleThis Company Specializes In Posting Losses
Next articleWhy Companies Issue Commercial Papers
Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

1 COMMENT

What's your say?