What is a Basis Point? Definition, Formula, and Example
A basis point is one one-hundredth of one percentage point (0.01%), the standard unit for quoting small changes in interest rates, bond yields, and credit spreads.
What Is a Basis Point?
A basis point — abbreviated "bp" and pronounced "bip" (plural "bips") — is a unit equal to 1/100th of a percentage point, or 0.0001 in decimal terms. Finance uses basis points instead of percentages whenever the moves in question are too small for percentages to communicate precisely: a bond yield moving from 4.35% to 4.42% is a "7 basis point" move, which is far more legible than saying it moved "0.07 percentage points" or, worse, calling it a "7% increase" (which would be wrong — that phrasing implies the yield rose 7% of its own value, i.e., to about 4.66%). Basis points remove that ambiguity entirely.
How It's Calculated
The conversion is fixed and simple:
1 basis point = 0.01% = 0.0001
100 basis points = 1%
To convert a percentage-point change to basis points, multiply by 100:
bps = (percentage point change) × 100
To convert basis points back to a percentage, divide by 100. A rate that rises from 3.75% to 4.00% has risen 25 basis points (0.25 percentage points × 100).
Worked Example
At its June 2026 meeting, the FOMC cut the federal funds target range by 25 basis points, from 3.75%-4.00% down to 3.50%-3.75% — the standard increment for a Fed move, though the Committee has used 50 bp and even 75 bp moves in more aggressive cycles. On the credit side, an investment-grade corporate bond trading at a spread of "Treasury plus 120 bps" over the 10-year yield is paying 1.20 percentage points of extra yield versus the risk-free benchmark to compensate for default risk. On the cost side, an index ETF charging a 3 bp expense ratio costs $3 a year per $10,000 invested, versus $75 a year for a 75 bp actively managed fund covering the identical exposure.
When Traders Use Basis Points
Rates traders and macro desks think exclusively in basis points because Fed decisions, Treasury auctions, and central bank policy statements are all communicated that way — "25 bps," "50 bps," "hike," "cut" is the native vocabulary of the repo rate, bond duration risk, and the yield curve. Credit and fixed-income traders quote corporate bond spreads in bps over the relevant Treasury. Options and futures markets sometimes price tick sizes in bps of notional. Fund investors compare expense ratios in bps because the percentage differences (0.03% vs 0.75%) look deceptively small until scaled to real dollar amounts. FX traders use bps to describe carry-trade rate differentials between two currencies' benchmark rates.
Limitations and Common Misconceptions
A basis point is a unit of measurement, not a judgment of magnitude — 25 bps is a routine, almost boring move for the Fed funds rate but would be an enormous single-day move for a stock index. Context always matters more than the raw number. Basis points also don't communicate dollar impact on their own: a 10 bp move on a $10,000 bond position is $10, but the same 10 bp move applied to a $10 billion institutional book is $10 million — you need the notional to translate bps into cash. Finally, stacking basis-point changes isn't strictly additive when compounding is involved (e.g., across multiple Fed meetings with reinvestment), though for single discrete rate changes the simple additive math holds.