Basis Point

Posted in Finance, Accounting and Economics Terms, Total Reads: 1021
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Definition: Basis Point

A ‘Basis Point’ or ‘bp’ is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.




  • The change in bank rates, interest rates and other indices is represented in basis points.

E.g. If the RBI lowers interest rates by 25 basis points, it means that rates have reduced by 0.25% percentage points.

  • In the bond market, a basis point is used to refer to the yield that a bond pays to the investor.

E.g.  if a bond yield moves from 7% to 7.25%, it is said to have risen 25 basis points.

  • Basis points arealso used to refer to the percentage change in the value of an asset such as a stock.

E.g. NASDAQ moved up 128 basis points in the day's trading. This represents a 1.28% increase in the value of the index.

 

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