Basis point
Encyclopedia
A basis point is a unit equal to 1/100 of a percentage point
or one part per ten thousand. The same unit is also (rarely) called a permyriad (literally meaning 'for (every) myriad
(ten thousand)'), and in that context is written with the sign (Unicode
U+2031, Numeric character reference
‱), which looks like a percent sign
(%) with two extra zeroes at the end (like a stylized form of the four zeros in the denominator, although it originates as a natural extension of the percent (%) and permille
(‰) signs).
A basis point is defined as:
It is frequently, but not exclusively, used to express differences in interest rates of less than 1% per year. For example, a difference of 0.10% is equivalent to a change of 10 basis points (e.g. a 4.67% rate increases by 10 basis points to 4.77%).
Like percentage point
s, basis points avoid the ambiguity between relative and absolute discussions about interest rates by dealing only with the absolute change in numeric value of a rate. For example, if a report says there has been a "1% increase" from a 10% interest rate, this could refer to an increase either from 10% to 10.1% (relative, 1% of 10%), or from 10% to 11% (absolute, 1% plus 10%). If, however, the report says there has been a "10 basis point increase" from a 10% interest rate, then we know that the interest rate of 10% has increased by 0.10% (the absolute change) to a 10.1% rate.
It is common practice in the financial industry to use basis points to denote a rate change in a financial instrument, or the difference (spread
) between two interest rates, including the yields
of fixed-income
securities
.
Since certain loans and bonds
may commonly be quoted in relation to some index or underlying security
, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest
of 0.50% per annum above the London Interbank Offered Rate
(LIBOR) is said to be 50 basis points over LIBOR, which is commonly expressed as "L+50bps" or simply "L+50".
The term "basis point" has its origins in trading the "basis" or the spread between two interest rates. Since the basis is usually small, these are quoted multiplied up by 10000, and hence a "full point" movement in the "basis" is a basis point. Contrast with pip's in FX forward markets.
The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.
Percentage point
Percentage points are the unit for the arithmetic difference of two percentages.Consider the following hypothetical example: in 1980, 40 percent of the population smoked, and in 1990 only 30 percent smoked...
or one part per ten thousand. The same unit is also (rarely) called a permyriad (literally meaning 'for (every) myriad
Myriad
Myriad , "numberlesscountless, infinite", is a classical Greek word for the number 10,000. In modern English, the word refers to an unspecified large quantity.-History and usage:...
(ten thousand)'), and in that context is written with the sign (Unicode
Unicode
Unicode is a computing industry standard for the consistent encoding, representation and handling of text expressed in most of the world's writing systems...
U+2031, Numeric character reference
Numeric character reference
A numeric character reference is a common markup construct used in SGML and other SGML-related markup languages such as HTML and XML. It consists of a short sequence of characters that, in turn, represent a single character from the Universal Character Set of Unicode...
‱), which looks like a percent sign
Percent sign
The percent sign is the symbol used to indicate a percentage .Related signs include the permille sign ‰ and the permyriad sign , which indicate that a number is divided by one thousand or ten thousand respectively...
(%) with two extra zeroes at the end (like a stylized form of the four zeros in the denominator, although it originates as a natural extension of the percent (%) and permille
Permille
A per mil or per mille is a tenth of a percent or one part per thousand. It is written with the sign ‰ , which looks like a percent sign with an extra zero at the end...
(‰) signs).
A basis point is defined as:
- 1 basis point = 1 permyriad = one one-hundredth percent
- 1 bp = 1 = 0.01% = 0.1‰ = 10−4 = = 0.0001
- 1% = 100 bp = 100
It is frequently, but not exclusively, used to express differences in interest rates of less than 1% per year. For example, a difference of 0.10% is equivalent to a change of 10 basis points (e.g. a 4.67% rate increases by 10 basis points to 4.77%).
Like percentage point
Percentage point
Percentage points are the unit for the arithmetic difference of two percentages.Consider the following hypothetical example: in 1980, 40 percent of the population smoked, and in 1990 only 30 percent smoked...
s, basis points avoid the ambiguity between relative and absolute discussions about interest rates by dealing only with the absolute change in numeric value of a rate. For example, if a report says there has been a "1% increase" from a 10% interest rate, this could refer to an increase either from 10% to 10.1% (relative, 1% of 10%), or from 10% to 11% (absolute, 1% plus 10%). If, however, the report says there has been a "10 basis point increase" from a 10% interest rate, then we know that the interest rate of 10% has increased by 0.10% (the absolute change) to a 10.1% rate.
It is common practice in the financial industry to use basis points to denote a rate change in a financial instrument, or the difference (spread
Yield spread
In finance, the yield spread is the difference between the quoted rates of return on two different investments, usually of different credit quality.It is a compound of yield and spread....
) between two interest rates, including the yields
Yield (finance)
In finance, the term yield describes the amount in cash that returns to the owners of a security. Normally it does not include the price variations, at the difference of the total return...
of fixed-income
Fixed income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....
securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
.
Since certain loans and bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
may commonly be quoted in relation to some index or underlying security
Security
Security is the degree of protection against danger, damage, loss, and crime. Security as a form of protection are structures and processes that provide or improve security as a condition. The Institute for Security and Open Methodologies in the OSSTMM 3 defines security as "a form of protection...
, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
of 0.50% per annum above the London Interbank Offered Rate
London Interbank Offered Rate
The LIBOR rate is the average interest rate that leading banks in London charge when lending to other banks. It is an acronym for London Interbank Offered Rate Banks borrow money for one day, one month, two months, six months, one year etc. and they pay interest to their lenders based on...
(LIBOR) is said to be 50 basis points over LIBOR, which is commonly expressed as "L+50bps" or simply "L+50".
The term "basis point" has its origins in trading the "basis" or the spread between two interest rates. Since the basis is usually small, these are quoted multiplied up by 10000, and hence a "full point" movement in the "basis" is a basis point. Contrast with pip's in FX forward markets.
The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.
See also
- Percentage pointPercentage pointPercentage points are the unit for the arithmetic difference of two percentages.Consider the following hypothetical example: in 1980, 40 percent of the population smoked, and in 1990 only 30 percent smoked...
- Percent (%) 1 part in 100
- PermillePermilleA per mil or per mille is a tenth of a percent or one part per thousand. It is written with the sign ‰ , which looks like a percent sign with an extra zero at the end...
(‰) 1 part in 1000 - Parts-per notationParts-per notationIn science and engineering, the parts-per notation is a set of pseudo units to describe small values of miscellaneous dimensionless quantities, e.g. mole fraction or mass fraction. Since these fractions are quantity-per-quantity measures, they are pure numbers with no associated units of measurement...
- Percentage in pointPercentage in pointIn finance, a percentage in point is the smallest commonly quoted change of an exchange rate of a currency pair.The major currencies, except the Japanese yen, are priced to four decimal places. For these currencies a pip is one unit of the fourth decimal point, or 1/100th of one percent...