What Is a Basis Point? (And Why Finance People Use Them)

The definition

One basis point (often abbreviated “bp” or “bps” for plural) equals:

• 0.01 percentage points
• 0.0001 as a decimal
• 1 part per 10,000

So 100 basis points = 1 percentage point.

Why finance uses them

To eliminate the percent-vs-percentage-points ambiguity. If interest rates move from 4% to 4.5%, saying “rates rose 50 basis points” is unambiguous. Saying “rates rose 0.5%” could mean +0.5 percentage points OR a 0.5% relative increase (= +0.02 percentage points).

Common usage

• Central bank rate changes: “The Fed raised rates 25 bps” means +0.25 percentage points
• Bond yields: “The 10-year Treasury rose 8 bps to 4.25%” — yields are sensitive to small absolute changes
• Expense ratios: “Vanguard’s S&P 500 index fund has a 3 bps expense ratio” = 0.03% annually
• Mortgage rates: “Add 25 bps to the prime rate”

Conversion table

Basis points	Percentage points
1 bp	0.01 pp
5 bps	0.05 pp
10 bps	0.10 pp
25 bps	0.25 pp
50 bps	0.50 pp
75 bps	0.75 pp
100 bps	1.00 pp
250 bps	2.50 pp

Why not just say “percentage points”?

Because in finance, even fractional percentage points matter, and saying “0.075 percentage points” is awkward where “7.5 basis points” is fast. The smaller unit makes finer-grained communication easier.