Basis point
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A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. The related term '' permyriad'' means one hundredth of 1 percent. Changes of interest rates are often stated in basis points. If an interest rate of 10% increased by 1 bp, it changed to 10.01%.


Definition

:1 basis point (bp) = (a difference of) 1‱ or 0.01% or 0.1‰ or 10−4 or or 0.0001. :10 bp = (a difference of) 0.1% or 1‰ or 10‱. :100 bp = (a difference of) 1% or 10‰ or 100‱. Basis points are used as a convenient
unit of measurement A unit of measurement is a definite magnitude of a quantity Quantity or amount is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", ...
in contexts where percentage differences of less than 1% are discussed. The most common example is
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s, where differences in interest rates of less than 1% per year are usually meaningful to talk about. For example, a difference of 0.10 percentage points is equivalent to a change of 10 basis points (e.g., a 4.67% rate increases by 10 basis points to 4.77%). In other words, an increase of 100 basis points means a rise by 1 percentage point. Like
percentage point A percentage point or percent point is the unit (measurement), unit for the Difference (mathematics), arithmetic difference between two percentages. For example, moving up from 40 percent to 44 percent is an increase of 4 percentage points, but a ...
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%). However, if the report says there has been a "100 basis point increase" from a 10% interest rate, then the interest rate of 10% has increased by 1.00% (the absolute change) to an 11% rate. It is common practice in the financial industry to use basis points to denote a rate change in a
financial instrument Financial instruments are monetary Contract, contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in ...
, or the difference ( spread) between two interest rates, including the yields of fixed-income
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
. Since certain
loans In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
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 In finance and economics, interest is payment from a debtor, borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is ...

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 10,000, and hence a "full point" movement in the "basis" is a basis point. Contrast with pips in FX forward markets. Expense ratios of investment funds are often quoted in basis points.


Permyriad

A related concept is one part per ten thousand, . The same unit is also (rarely) called a permyriad, literally meaning "for (every) myriad (ten thousand)". If used interchangeably with basis point, the permyriad is potentially confusing because an increase of one basis point to a 10 basis point value is generally understood to mean an increase to 11 basis points; not an increase of one part in ten thousand, meaning an increase to 10.001 basis points. This is akin to the difference between
percentage In mathematics, a percentage (from la, per centum, "by a hundred") is a number or ratio expressed as a fraction (mathematics), fraction of 100. It is often Denotation, denoted using the percent sign, "%", although the abbreviations "pct.", "p ...

percentage
and
percentage point A percentage point or percent point is the unit (measurement), unit for the Difference (mathematics), arithmetic difference between two percentages. For example, moving up from 40 percent to 44 percent is an increase of 4 percentage points, but a ...
.


Unicode

A permyriad is written with which looks like a
percent sign The percent sign (sometimes per cent sign in British English) is the symbol used to indicate a percentage, a number or ratio as a fraction (mathematics), fraction of 100. Related signs include the permille (per thousand) sign and the Basis p ...
with three zeroes to the right of the slash. (It can be regarded as a stylized form of the four zeros in the denominator of "", although it originates as a natural extension of the
percent In mathematics, a percentage (from la, per centum, "by a hundred") is a number or ratio expressed as a fraction (mathematics), fraction of 100. It is often Denotation, denoted using the percent sign, "%", although the abbreviations "pct.", "p ...

percent
and permille signs.)


Related units

*
Percentage point A percentage point or percent point is the unit (measurement), unit for the Difference (mathematics), arithmetic difference between two percentages. For example, moving up from 40 percent to 44 percent is an increase of 4 percentage points, but a ...
difference of 1 part in 100 *
Percentage In mathematics, a percentage (from la, per centum, "by a hundred") is a number or ratio expressed as a fraction (mathematics), fraction of 100. It is often Denotation, denoted using the percent sign, "%", although the abbreviations "pct.", "p ...

Percentage
(%) 1 part in 100 *
Per mille Per mille (from New Latin, Latin , "in each thousand") is an expression that means parts per thousand. Other recognised spellings include per mil, per mill, permil, permill, or permille. The associated sign is written , which looks like a ...
(‰) 1 part in 1,000 * Per cent mille (pcm) 1 part in 100,000 *
Parts per million In science and engineering, the parts-per notation is a set of pseudo-units to describe small values of miscellaneous dimensionless quantity, dimensionless quantities, e.g. mole fraction or mass fraction (chemistry), mass fraction. Since these f ...
(ppm) 1 part in 1,000,000


See also

*
Parts-per notation In science and engineering, the parts-per notation is a set of pseudo-units to describe small values of miscellaneous dimensionless quantity, dimensionless quantities, e.g. mole fraction or mass fraction (chemistry), mass fraction. Since these f ...
* Per-unit system * Percent point function * Tick size


References


External links

* {{navbox punctuation Fixed income Typographical symbols Interest rates Operations of central banks