What is a basis point?
In one line: A basis point is one hundredth of one percent, or 0.01%. So 100 basis points equal 1%, and 25 basis points equal 0.25%.
A simple example
The Fed raises its rate range from 4.00%–4.25% to 4.25%–4.50%. That's a move of 0.25 percentage points. People say the Fed raised rates by 25 basis points, or "25 bps" (said "bips").
Bonds use the same unit. If the 10-year Treasury yield goes from 4.10% to 4.18%, it rose 8 basis points.
| Basis points | Percent |
|---|---|
| 1 | 0.01% |
| 10 | 0.10% |
| 25 | 0.25% |
| 50 | 0.50% |
| 100 | 1.00% |
Why it matters
Rates and yields move in small steps. "Up 0.08%" is easy to misread. Is that 0.08 percentage points, or 8% of the old number? Basis points remove the doubt. 8 bps always means 0.08 points.
You'll hear the term on FOMC days, in CPI coverage and in bond news. A Rate hike or Rate cut of 25 bps is a normal-sized step. A 50 or 75 bp move tells you the Central bank wants a bigger change. Markets often react to the size of the step as much as the step itself. More in how interest rates affect stocks.
A common mistake
Mixing up percent and percentage points. A rate going from 2% to 3% is up 1 percentage point, or 100 basis points. But it's up 50% in relative terms, because 1 is half of 2. Headlines sometimes blur the two. Basis points always mean the simple point change.
Quick rule: move the decimal two places. 0.25% → 25 bps. 150 bps → 1.50%.
Questions
How much is 1 basis point?
0.01%, one hundredth of a percent. On a $10,000 loan, 1 basis point a year is $1.
What does a 25 basis point rate cut mean?
The rate drops by 0.25 percentage points. A 4.50% rate would become 4.25%.
Why do traders say "bips"?
It's short for "bps", the written short form of basis points. It's just quicker to say.
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