A basis point is a unit equal to one hundredth of a percentage point. One basis point is 0.01%, and 100 basis points make one full percentage point. Market people shorten it to bps and often say it out loud as “bips”.
You will see basis points used to describe small moves in interest rates, bond yields, credit spreads and ongoing fees. Saying “rates rose 25 bps” is precise: it means the rate went up by 0.25 percentage points. That clarity avoids confusion between a change in percentage points and a percentage change.
Why markets use basis points instead of percentages
Financial prices and rates often move by tiny amounts. Quoting everything to two decimal places in per cent can get fiddly, and it can also be ambiguous. If a loan rate goes from 2% to 3%, that is a one percentage point increase, but a 50% jump in relative terms. Basis points remove that ambiguity. “Up 100 bps” leaves no doubt that it rose by one percentage point.
This precision matters when the numbers stack up. A large bond manager, a bank treasury desk, or a central bank statement will usually refer to moves in basis points so there is a shared language for small differences.
Converting between basis points and percentages
- From basis points to per cent: per cent = bps × 0.01. Example: 45 bps = 0.45%.
- From per cent to basis points: bps = per cent × 100. Example: 2.5% = 250 bps.
- From basis points to percentage points: percentage points = bps ÷ 100. Example: 25 bps = 0.25 percentage points.
- Decimal form: 1 bp = 0.0001 as a decimal rate.
Quick mental checks help. If someone quotes a management fee of 65 bps, think 0.65% per year. A credit spread that tightens by 12 bps narrows by 0.12 percentage points.
Where you will see basis points in practice
- Central bank and policy rates. Decisions are often described as 25 bps or 50 bps moves. Variable-rate loans are commonly priced as the base rate plus a margin measured in basis points.
- Bond yields and credit spreads. Government bond yields are reported with daily changes in bps. The extra yield on a corporate bond over a government bond of similar maturity is its credit spread, also quoted in bps.
- Interest rate swaps and derivatives. Swap rates, swap spreads and changes in implied rates are discussed in bps. Risk measures like DV01, also called PV01 or value of a basis point, use this unit by design.
- Fund and ETF fees. Ongoing charges and expense ratios are often expressed in bps. For example, 20 bps equals a 0.20% annual fee.
- Bank lending and mortgages. A lender might quote a mortgage at 180 bps over a reference rate. If the reference is 3.00%, the pay rate is 4.80%.
- Crypto and digital-asset contexts. Analysts may describe small shifts in staking yields, funding rates or stablecoin lending rates in bps to stay consistent with broader fixed income language.
Basis points vs percentage points, pips and ticks
Percentage points: Basis points measure slices of a percentage point. A move from 1.75% to 2.00% is a 0.25 percentage point rise, which is 25 bps. It is not a 25% increase in the rate. The percentage increase would be 14.29% in that case. Mixing these up changes the meaning entirely.
Pips: In foreign exchange, a pip is the standard unit of price movement, usually 0.0001 for most currency pairs. That is not the same thing as a basis point in interest rates, although 1 pip equals 1 bp only if you are comparing two numbers both quoted in per cent. A 1 pip move in an FX rate does not necessarily mean a 1 bp move in a yield.
Ticks: A tick is the minimum price increment allowed for a given instrument on an exchange. A tick in a bond future or equity future is a step in price, not a step in yield. One tick can be worth several basis points of yield for short-dated contracts and fewer for long-dated ones. The conversion depends on contract specs and prevailing levels.
How basis points feed into risk and pricing
Risk managers and traders turn basis point moves into currency P&L using DV01 or PV01. DV01 means the change in the value of a position for a 1 bp move in yield, holding everything else constant.
A common approximation is: DV01 ≈ modified duration × price × 0.0001, where price is per 100 of face value. Suppose a bond priced at 102 has a modified duration of 6. A 1 bp rise in yield reduces the bond’s price by roughly 6 × 102 × 0.0001 = 0.0612 per 100 of face value. On £1,000,000 nominal, that is about £612. A 10 bp shift would be about £6,120. The same idea applies to swaps, where PV01 measures sensitivity to a 1 bp move in the relevant curve.
This link between small rate moves and cash outcomes is why basis points show up in hedge ratios, risk limits and scenario analysis. It also explains why desks care about a change as small as 3 to 5 bps when positions are large.
Worked examples you can sanity check
- Policy move: A rate goes from 2.50% to 2.75%. Change = 25 bps. In percentage terms that is a 10% increase in the level, but traders will quote 25 bps to avoid ambiguity.
- Fund fee: An ETF charges 45 bps per year. On £20,000, the fee is 0.45% × £20,000 = £90 for a full year, ignoring compounding and any partial periods.
- Credit spread: A corporate bond trades at 150 bps over the government curve and later at 132 bps. The spread tightened by 18 bps. All else equal, that usually means the bond price rose.
- Loan margin: A facility is priced at 3-month reference rate plus 210 bps. If the reference prints 4.10%, the borrower pays 6.20% for that period.
- Risk impact: A portfolio has a total DV01 of £4,500. If yields rise by 7 bps across the positions, the mark-to-market loss is roughly 7 × £4,500 = £31,500.
Once you are comfortable flipping between bps and per cent, you can read rate moves, fee schedules and spread shifts at a glance without reaching for a calculator.