What is a Basis Point? Meaning, Calculation, Examples & Complete Guide

A basis point (or bps) is a unit used to measure small changes in interest rates or percentages. One basis point is equal to 0.01%, or 1/100th of 1%.

Financial experts use basis points to explain changes that may seem tiny but can have a big impact. For example, if a bank increases an interest rate from 5.00% to 5.25%, it has gone up by 25 basis points, not just 0.25%.

Here is a simple table to show how basis points work:
 

So, if you take a loan and the rate increases by 50 basis points, that means it rises by 0.50%. This small change can affect your monthly payment and total interest.

How to Calculate Basis Points?

Calculating basis points is very easy if you remember one thing: 1 basis point equals 0.01%. If you want to change basis points into a percentage, just divide the number by 100.

Simple Formula

Basis Points ÷ 100 = Percentage

Example

Let’s say the interest rate rises by 129 basis points. Just do this:

129 ÷ 100 = 1.29%

So, the rate went up by 1.29%.

You can also move the decimal two places to the left.
129 → 1.29

Here’s a quick table to help you remember:

So next time you see “25 bps”, you’ll know it means 0.25% a small change that can still matter a lot!

The Pinch of a Paisa: Understanding Basis Points Like Everyday Money

Think of a basis point like a paisa in a rupee, tiny, but it counts. Just like 100 paisa makes ₹1, 100 basis points make 1%. In finance, small shifts like these can change how much you pay or earn.

Imagine you’re buying two ice creams:
 

It’s the same with loans or savings, a few basis points can make a big difference when the amounts are large. That’s why people in finance use this tiny unit to stay exact, just like shopkeepers count every paisa.

How We Use Basis Points in Interest Rate Changes?

People often use basis points to explain small changes in interest rates. This makes the numbers easier to read and avoids confusion.

For example, if a bank increases the loan interest rate from 7.00% to 7.25%, we say the rate went up by 25 basis points. This is clearer than saying “it increased by 0.25%,” which can sometimes confuse people.

Here’s another example:
If the Reserve Bank lowers the rate by 50 basis points, it means the rate drops by 0.50%.

Banks, lenders, and investors all use basis points to:
 

• Explain how much interest has changed
   
• Compare loan and savings rates
   
• Understand how changes affect payments or earnings
   

So, basis points help everyone talk about interest rates in a simple and exact way.

How a Tiny Change Makes a Big Difference: Understanding Basis Points?

Let’s say you buy a government bond that gives you 12.50% interest. After some time, the rate drops to 12.25%. That’s a small change, but let’s see how we measure it.

Use this formula:
Percentage × 100 = Basis Points
0.25% × 100 = 25 basis points

Therefore, the interest rate dropped by 25 basis points. That may sound insignificant, but over time, it affects your earnings.

Now, let’s see where we use basis points in real life:
 

• Treasury Bonds
  The government uses basis points to show changes in interest on these safe investments.
   
• Corporate Bonds
  Companies borrow money and pay interest. Basis points help track these changes.
   
• Credit Cards
  Banks may raise or lower your card’s interest using small steps like 10 or 25 bps.
   
• Futures and Options
  In stock trading, people use basis points to measure small shifts in returns.

Even small changes in rates can mean a lot, and basis points help you see that.

Why Do People Use Basis Points?

Basis points may seem small, but they offer big advantages. They help explain tiny changes clearly and avoid confusion when talking about interest rates or market movements.

Here’s a simple table to show the benefits:
 

So, basis points turn tricky numbers into simple ones that everyone can understand, which is very useful in the world of money.

Why Basis Points Matter in Finance?

Basis points may sound small, but they play a big role in helping people make smart money decisions. Let’s see why they are so important.

1. They Give Accurate Numbers

A basis point shows tiny changes clearly. If an interest rate goes from 6.00% to 6.10%, we say it rose by 10 basis points. That makes things exact and easy to follow.

2. They Keep Things Fair

Investors use basis points to compare different investments. It gives everyone a standard way to measure changes, no matter what they are investing in.

3. They Help in Trading

Traders watch for small price changes. If one bond gives a better return than another by 25 basis points, it may be a smart buy. Basis points help traders spot chances to earn more.

4. They Make Loans Clearer

Banks show interest rates in basis points. This helps borrowers compare loans and pick the one that costs less in the long run.

5. They Help Manage Risk

Investors use basis points to understand how small changes in rates can affect their money. This helps them plan better and avoid big losses.

Conclusion

A basis point is a small but powerful tool in finance. It helps people explain tiny changes in interest rates or returns clearly and accurately. Whether you're a borrower, investor, or trader, knowing how basis points work can help you make smarter money decisions.

FAQ’s
 

1. Why do banks use basis points instead of percentages?
Banks use basis points to show small rate changes clearly, avoiding confusion between 0.1% and 1%.

2. Can basis points change my loan interest a lot?
Yes, even 25 or 50 basis points can raise or lower your total loan cost over time.

3. Are basis points only used in interest rates?
No, basis points are also used in bonds, trading, and investment returns.

4. How do I change basis points into a percentage?
Just divide the number of basis points by 100. For example, 75 bps = 0.75%.

5. Do all investors need to know basis points?
Yes, understanding basis points helps investors read market changes and compare options better.

 

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About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.