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Investing Glossary

Basis Point

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The term basis points (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%. In decimal form, one basis point appears as 0.0001 (0.01/100). Basis points are used to show the change in the value or rate of a financial instrument. The relationship between percentage changes and basis points can be summarized as follows. A 1% change equals a change of 100 basis points and 0.01% change equals one basis point. Basis points are typically expressed with the abbreviations bp, bps, or bips. A basis point is a standard measure for interest rates and other percentages in finance. The word basis comes from the base move between two percentages, or the spread between two interest rates. The basis point is commonly used for calculating changes in interest rates, equity indices, and fixed-income security yields. Basis points are also used when referring to the cost of mutual funds and exchange-traded funds. By using basis points in conversation, traders and analysts remove some of the ambiguity or confusion that can arise when talking about percentage moves. A basis point may be small, but it can have a big impact on the overall economy. For example, if interest rates go up by even a few basis points, that translates to billions, if not trillions, of additional dollars affecting the mortgage industry, credit card rates, and other financial instruments. The Federal Reserve uses basis points to express changes in the fed funds rate.

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