Basis Point

A basis point, often abbreviated bp or bps in the plural, is a unit equal to 0.01 percentage points, or one one-hundredth of a percentage point.

Basis points are commonly used in finance to describe small changes in:

• Interest rates
• Bond yields
• Credit spreads
• Expense ratios
• Loan rates
• Investment returns

The conversion is:

1 Basis Point = 0.01%

100 Basis Points = 1.00%

For investors, basis points make it easier to describe small percentage changes precisely and avoid confusion between percentage-point changes and percentage changes.

Why Basis Points Matter

Basis points are widely used because financial rates often move by relatively small amounts.

For example, saying:

“The bond yield increased by 25 basis points”

is clearer than saying:

“The bond yield increased by 0.25 percentage points.”

Both statements mean the same thing.

Investors use basis points when discussing:

• Treasury yields
• Corporate bond yields
• Credit spreads
• Federal Reserve rate changes
• Mortgage rates
• Bank lending rates
• Fund expense ratios
• Investment fees

Understanding basis points is essential for reading financial news and analyzing fixed-income markets.

Basis Point Formula

The basic relationship is:

1 Basis Point = 0.01 Percentage Points

To convert basis points to a percentage:

Percentage Points =
Basis Points ÷ 100

For example:

50 Basis Points ÷ 100
= 0.50 Percentage Points

To convert percentage points to basis points:

Basis Points =
Percentage Points × 100

For example:

1.25 Percentage Points × 100
= 125 Basis Points

Basis Point Examples

Common conversions include:

Basis Points	Percentage Points
1 bp	0.01%
10 bps	0.10%
25 bps	0.25%
50 bps	0.50%
75 bps	0.75%
100 bps	1.00%
200 bps	2.00%

If a bond yield rises from 4.00% to 4.25%, the increase is:

4.25% - 4.00%
= 0.25 Percentage Points
= 25 Basis Points

Basis Points in Fundamental Investing

Basis points frequently appear in fundamental investing because small changes in financing costs can have large effects on companies.

For example, suppose a company has:

Debt: $5 Billion
Borrowing Cost Increase: 100 Basis Points

A 100-basis-point increase equals 1 percentage point.

Ignoring complications such as fixed versus floating-rate debt, the additional annual interest cost on $5 billion could be approximately:

$5 Billion × 1%
= $50 Million

That additional expense could reduce:

• Net income
• Free cash flow
• Interest coverage
• Earnings per share
• Intrinsic value

Small movements measured in basis points can therefore have meaningful business consequences.

Basis Points vs. Percentage Points

Basis points and percentage points are closely related.

100 Basis Points
=
1 Percentage Point

Suppose an interest rate rises:

From 4% to 5%

The change is:

• 1 percentage point
• 100 basis points

It is not merely a 1% relative increase.

The relative percentage increase is:

(5% - 4%) ÷ 4%
= 25%

This distinction is one reason financial professionals use basis points.

Basis Points vs. Percent Change

A basis-point change measures the absolute difference between two percentage rates.

A percent change measures the relative change from the starting value.

For example, if a yield rises from 2% to 3%:

Basis-Point Change:
3% - 2% = 1 Percentage Point = 100 bps

But the relative percent increase is:

(3% - 2%) ÷ 2%
= 50%

The two figures describe different things.

Basis Points and Bond Yields

Bond yields are frequently quoted in basis points because relatively small changes can materially affect bond prices.

Suppose a Treasury yield rises:

From 4.20%
to 4.45%

The increase is:

25 Basis Points

For longer-duration bonds, a 25-basis-point change can create a meaningful price movement.

This is why basis points are central to fixed-income analysis.

Basis Points and Credit Spreads

Credit spreads are also commonly expressed in basis points.

Suppose:

Corporate Bond Yield: 6.0%
Treasury Yield: 4.0%

The credit spread is:

6.0% - 4.0%
= 2.0 Percentage Points
= 200 Basis Points

If the spread later widens to 300 basis points, investors are demanding an additional 100 basis points of compensation for credit and related risks.

Basis Points and Bond Prices

Basis points describe yield changes, but those changes can affect bond prices.

Generally:

Yields Rise
→ Bond Prices Fall

Yields Fall
→ Bond Prices Rise

Suppose a bond has modified duration of 6.

A 50-basis-point increase in yield equals:

50 bps = 0.50%

A rough duration estimate would be:

Approximate Price Change
=
-6 × 0.50%

≈ -3%

This illustrates why seemingly small basis-point moves matter to bond investors.

Basis Points and Interest Rates

Interest-rate changes are often communicated in basis points.

For example:

Rate Increase of 25 Basis Points
=
0.25 Percentage Points

If an interest rate rises from 5.00% to 5.25%, it increased by 25 basis points.

If it falls from 5.00% to 4.50%, it declined by 50 basis points.

Basis-point terminology makes these changes easy to compare.

Basis Points and Corporate Borrowing Costs

A company’s borrowing cost may rise or fall by dozens or hundreds of basis points.

Suppose a company refinances $2 billion of debt.

Old borrowing rate:

5%

New borrowing rate:

6.5%

The increase is:

1.5 Percentage Points
=
150 Basis Points

Approximate additional annual interest expense:

$2 Billion × 1.5%
= $30 Million

This can materially affect a leveraged company’s profitability and free cash flow.

Basis Points and Credit Risk

Credit markets often interpret spread movements in basis points.

For example:

Credit Spread:
150 bps → 250 bps

The spread widened by:

100 Basis Points

Widening spreads can indicate:

• Greater perceived credit risk
• Lower investor risk appetite
• Weakening financial conditions
• Reduced market liquidity

Narrowing spreads may indicate improving credit conditions or stronger investor demand.

Basis Points and WACC

Small changes in the Weighted Average Cost of Capital (WACC) can have large valuation effects.

Suppose a company’s WACC rises:

From 8.0%
to 8.5%

That is an increase of:

50 Basis Points

A higher discount rate reduces the present value of future cash flows, all else equal.

For companies whose valuation depends heavily on cash flows far into the future, even a 25- or 50-basis-point change can materially affect estimated intrinsic value.

Basis Points and Expense Ratios

Basis points can also describe investment-management fees.

Suppose an ETF has an expense ratio of:

0.20%

That equals:

20 Basis Points

An expense ratio of 0.75% equals 75 basis points.

For long-term investors, differences of even a few basis points in annual fees can compound over many years.

Basis Points and Portfolio Management

Portfolio managers use basis points to measure small changes in:

• Returns
• Yields
• Fees
• Spreads
• Benchmark performance

Suppose a portfolio returns 8.25% while its benchmark returns 8.00%.

The portfolio outperformed by:

0.25 Percentage Points
=
25 Basis Points

Basis points provide a convenient way to communicate small performance differences.

Why Use Basis Points Instead of Percentages?

Basis points reduce ambiguity.

Consider the statement:

“The interest rate increased by 10%.”

If the original rate was 5%, that could mean the rate increased by 10% of 5%:

5% × 1.10 = 5.5%

But saying:

“The rate increased by 10 basis points”

clearly means:

5.00% → 5.10%

Basis points provide precision when discussing financial rates.

Common Basis Point Mistakes

Common mistakes include:

• Assuming 100 basis points equals 100%
• Confusing basis points with percent change
• Confusing percentage points with relative percentage change
• Forgetting that 25 basis points equals 0.25 percentage points
• Writing 100 bps as 0.01%
• Misreading credit-spread changes
• Applying basis points directly to dollar values without first converting the rate

The essential conversion is:

100 Basis Points = 1%

Related Terms

• Credit Spread
• Yield
• Yield to Maturity (YTM)
• Current Yield
• Coupon Rate
• Treasury Yield Curve
• Corporate Bond
• Treasury Bond
• Investment-Grade Bond
• High-Yield Bond
• Bond Duration
• Modified Duration
• Interest Rate Risk
• Expense Ratio
• Cost of Debt
• Weighted Average Cost of Capital (WACC)
• Discount Rate
• Portfolio Management

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