Basis Points (bps)
A unit equal to 1/100th of a percentage point (0.01%), used to express small differences in rates, yields and spreads precisely — e.g. "the spread widened 25 bps."
Basis Points (bps) · the mechanism
30 sec read
Move between basis points, percentages and money without hesitating, and know why the unit exists.
Where it comes up. A director negotiating a fee asks what twenty-five basis points is worth over the life of the fund, and waits while you do it in your head.
One basis point is one hundredth of a per cent
100bp is 1%. 25bp is 0.25%. The unit exists to remove an ambiguity: "rates rose two per cent" could mean from 4% to 6% or from 4% to 4.08%, and "rates rose 200 basis points" cannot be misread.
Convert to money by multiplying the notional
One basis point on £10m is £1,000. That is the arithmetic underneath a fee discussion, a spread quote and a hedge, and it should be automatic rather than calculated.
Know where it turns up
Interest rate moves and central bank decisions, credit spreads, management fees, bid-ask spreads, tracking error and index weights. Anywhere a small change in a percentage carries a large amount of money.
Worked through
A £250m fund negotiating its management fee down from 150bp to 125bp.
- The reduction
- 25bp = 0.25%
- On £250m
- £625,000 a year
- Over a ten-year fund life
- about £6.25m, before any effect on returns
A quarter of a percentage point, which sounds like rounding, is £6m over a fund life. This is why fee negotiations are conducted in basis points: the unit makes the money visible.
Check yourselfA bond yield goes from 4.20% to 4.55%. By how many basis points, and what is that worth on £50m?
Answer once you have one →
35 basis points. On £50m of notional that is £175,000 a year of income difference, and on the price of a long-dated bond the capital move is considerably larger again, because price moves with duration times the yield change rather than one for one.
Be able to say this back next week
- Converted between basis points and per cent without pausing
- Turned basis points into money by multiplying the notional
- Said why the unit exists: it removes the ambiguity in “rose two per cent”
Why Basis Points (bps) matters in interviews
Basis points are the unit finance argues in, and using them wrongly in an interview marks you out immediately. They exist because "the rate rose one percent" is genuinely ambiguous, and in rates, credit and fees that ambiguity is expensive.
How it works in practice
One basis point is one hundredth of a percentage point: 0.01%, or 0.0001 as a decimal. One hundred basis points make one percentage point. Say it "bips".
The ambiguity it removes: if a yield goes from 4.00% to 5.00%, has it risen one percent or twenty-five percent? Both readings are defensible, which is why nobody says it that way. It rose 100 basis points, and there is no second reading.
Where the number bites: on a £500m loan, a 25bp change in the margin is £1.25m a year. A 2% management fee is 200bp; a fund charging 150bp instead has given up a quarter of its fee revenue. A term loan priced at SOFR plus 350 pays 3.50 percentage points over the reference rate. In equities a 10bp position in a $2bn fund is a $2m holding — small enough to be a starter position rather than a view.
Basis points also carry the sign of a trade in credit. A bond that "tightened 40bp" has had its spread over the benchmark fall by 0.40 percentage points, which means its price rose. Tighter is better for the holder, and getting that direction backwards is a common slip.
What candidates get wrong
- Confusing a percentage change with a change in percentage points. A move from 2% to 3% is 100bp, not 50bp, even though the rate rose by half again.
- Mixing the units mid-sentence. "The margin went up by 0.5 basis points" almost always means 50 basis points, and the correction is embarrassing to make in a final round.
- Forgetting the direction convention in credit. Spreads tightening is a price rise; spreads widening is a price fall.
- Quoting fees in percent and spreads in basis points in the same table. Pick one unit per column and label it, because a reader scanning a page will not check.
Basis Points (bps): frequently asked questions
What is a basis point?
One basis point is one hundredth of one percentage point — 0.01%. One hundred basis points equal one percentage point. The unit exists to remove ambiguity: saying a yield "rose one percent" could mean it moved from 4.00% to 5.00% or from 4.00% to 4.04%, whereas "rose 100 basis points" can only mean the first.
How much is 50 basis points?
Half a percentage point, or 0.50%. On a £100m loan that is £500,000 a year. Central bank rate decisions are usually quoted this way: a "50bp hike" is a half-point increase in the policy rate.
Why does finance use basis points instead of percentages?
Because a percentage change of a percentage is ambiguous, and in rates, credit spreads and fee structures the amounts involved make that ambiguity costly. Basis points are always absolute: a change of 25bp means the same thing whether the starting rate was 2% or 9%. They also give a convenient whole-number scale for the small moves that matter in fixed income, where a single basis point on a large book is a material sum.
Where Basis Points (bps) comes up
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