In finance, you will commonly see basis points written as “bps.”
A basis point is a measure used to quantify changes in finance. One basis point is equal to one one-hundredth of one percentage point (0.01%). You could also think of it as 100 basis points being equivalent to 1%.
The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
For example, if the Reserve Bank of Australia interest rates by 20 basis points, this means that the rates were lowered by 0.2%. An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%. The difference between 12.83% and 12.88% is five basis points.
This measure helps people in finance avoid confusion. A statement such as, “a 1% increase from a 10% interest rate,” could be interpreted one of two ways: an increase from 10% to 10.1% (relative) or 10% to 11% (absolute). Instead, “A 100 basis point increase” would signal that the rate has increased from 10% to 11%.
Using basis points clarifies this ambiguity.