Basis Points

A unit of measurement equal to one-hundredth of one percentage point (0.01%), commonly used to describe changes in interest rates, bond yields, and credit spreads.

Basis points (bps, pronounced "bips") exist because percentage-point descriptions can be ambiguous when dealing with rates. If an interest rate rises "one percent," does that mean from 4% to 5% (a 100 bps increase) or a 1% relative increase to 4.04%? Basis points eliminate this ambiguity: one basis point always equals exactly 0.01 percentage point.

The Federal Reserve adjusts the federal funds rate in increments of 25 basis points under normal conditions, though it has used 50 bps and even 75 bps moves during aggressive tightening cycles. A 100 basis point move equals 1 full percentage point. Yield spreads — the difference in yield between two bonds — are quoted in basis points. A corporate bond yielding 150 bps more than a comparable Treasury is said to have a 150 bps credit spread.

Basis points are universal across fixed income, foreign exchange, and derivatives — any context where precise, unambiguous rate or spread language is needed. In mortgage markets, rate quotes and servicing values are routinely expressed in basis points. In options markets they describe small changes in implied volatility or Greeks.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.