Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Basis Point ====== A Basis Point (often abbreviated as 'bp' or 'bip') is the finance world's way of talking about tiny changes with absolute precision. Think of it as a specialized, finer measurement for percentages. Specifically, one basis point is equal to one-hundredth of one percent (0.01%), or 0.0001 in decimal form. To put it simply, 100 basis points make up a full 1%. This unit is most commonly used when discussing changes in [[interest rates]], [[bond]] [[yields]], and the costs associated with investment products like [[mutual funds]]. The main reason for its existence is to avoid the ambiguity that can arise when talking about percentage changes. For instance, if an interest rate of 10% "increases by 10%," does that mean it's now 11% (a 1 percentage point increase) or 20% (a 10% increase //of// the original 10%)? Basis points eliminate this confusion entirely. ===== Why Not Just Say "Percent"? ===== You might be wondering, "Why create a whole new term? Can't we just stick with percentages?" The main reason is **clarity**. In the world of finance, where a fraction of a percent can mean millions of dollars, there's no room for misunderstanding. When a [[central bank]] like the [[Federal Reserve]] announces it's raising rates by '25 basis points,' everyone in the market knows that means a precise 0.25% increase. It removes the ambiguity of saying "a quarter of a percent increase" or "an increase of 0.25 percent." It's the language of precision, ensuring that a trader in New York and a banker in Frankfurt are on the exact same page. Here is a quick reference for converting basis points to percentages: * 1 bp = 0.01% * 25 bps = 0.25% (A common increment for interest rate changes) * 50 bps = 0.50% * 100 bps = 1.00% * 10,000 bps = 100% ===== Basis Points in Action ===== ==== Interest Rates and Bonds ==== This is where basis points truly shine. When the [[European Central Bank]] or the Fed changes its key interest rate, the move is almost always announced in basis points. A "25 bps hike" is a standard tightening move, while a "50 bps cut" signals a more aggressive easing of monetary policy. For bond investors, basis points are the daily language. The difference in yield between two different bonds, known as the [[yield spread]], is quoted in basis points. For example, if a corporate bond yields 4.50% and a government bond yields 4.10%, the spread is 40 basis points. This spread is a key indicator of perceived risk. ==== Investment Fees ==== Ever looked at the fees for a mutual fund or an [[ETF]]? The [[expense ratio]]—what you pay the fund manager annually—is often expressed in basis points. A fund with an expense ratio of 75 bps costs you 0.75% of your investment each year. Comparing two funds, one with a 75 bps fee and another with a lean 25 bps fee, makes the cost difference stark and easy to calculate. ===== The Value Investor's Perspective ===== For a [[value investor]], every basis point counts. The philosophy of [[value investing]] is built on finding a [[margin of safety]] and maximizing long-term returns, which means being acutely aware of both costs and potential gains. A few basis points saved on an expense ratio can compound into a significant sum over decades, directly impacting your final nest egg. It's the financial equivalent of a leaky faucet; the drip-drip-drip of high fees seems small at first but leads to a substantial loss over time. Similarly, when analyzing a bond, the extra 50 basis points of yield on an undervalued corporate bond compared to a government bond can be the difference that makes an investment worthwhile. Warren Buffett famously said, "//Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.//" Minimizing costs, which are measured in basis points, is a direct application of this principle. It's about sweating the small stuff so your long-term returns don't have to.