Basis points (bps) are a common measure for interest rates and fund costs. One basis point is 1/100th of 1%. In other words, it’s 0.01% or .0001.
An interest rate change of 1% is 100 basis points. So, if an interest rate went from 4% to 4.25%, it went up by 25bps.
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“The word basis in the term basis point comes from the base move between two percentages, or the spread between two interest rates,” per Investopedia. “Since the changes recorded are usually narrow, and because small changes can have outsized outcomes, the basis is a fraction of a percent.”
Retail investors most frequently encounter basis points when discussing mortgage interest rates, bond yields and an investment fund’s total expense ratio.
