A basis point is one hundredth of a percentage point. One basis point equals 0.01%, so 100 basis points equals 1 percentage point.
Why the term exists
Economists, bond traders, and central bankers use basis points to avoid ambiguity. Saying an interest rate “rose by 1%” can mean either:
- it increased by 1 percentage point, or
- it increased by 1% relative to its old level.
Saying it rose by 100 basis points removes that confusion.
Conversion logic
- 1 bp = 0.01 percentage point
- 25 bps = 0.25 percentage point
- 250 bps = 2.50 percentage points
If a policy rate rises from 4.00% to 4.25%, that is a 25 basis point increase.
Economic use
Basis points are common in:
- central-bank rate decisions,
- bond-yield moves,
- credit spreads,
- mortgage and lending-rate quotations.
Small changes in basis points can still matter a lot when they apply to large volumes of debt.
Related Terms
Knowledge Check
### How much is 1 basis point?
- [x] 0.01 percentage point
- [ ] 0.10 percentage point
- [ ] 1 percentage point
- [ ] 10 percentage points
> **Explanation:** A basis point is one hundredth of a percentage point, which is why 100 basis points equals 1 percentage point.
### If an interest rate rises from 3.50% to 3.75%, how large is the increase?
- [x] 25 basis points
- [ ] 2.5 basis points
- [ ] 50 basis points
- [ ] 75 basis points
> **Explanation:** The change is 0.25 percentage point, which equals 25 basis points.
### Why do economists often use basis points instead of percentages when discussing rates?
- [x] To distinguish absolute changes in rates from relative percentage changes
- [ ] Because percentages cannot be used for interest rates
- [ ] Because basis points are always larger than percentages
- [ ] To avoid quoting decimals
> **Explanation:** Basis points make it clear that the speaker means a change in the level of the rate, not a proportional change.