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You’ll often hear economists and financial journalists talk about basis points. What are they and how can you convert them?
A basis point (bps) is 1/100 of 1%. This is a useful unit of measurement when talking about interest rates, bond yields, change in stock prices and other numbers expressed as percentages.
Basis points help avoid confusion when talking about changes to values expressed as percentages. For instance, if mortgage rates are 4% and they increase by 1%, are they now 5% or 4.04%? Using basis points, a move from 4% to 5% is a jump of 100 basis points, while an increase from 4% to 4.04% is a difference of 4 basis points.
To convert basis points to percentages, divide by 100. To convert percentages to basis points, multiply by 100.
Example: “Margot’s bank was paying 4.15% on one-year guaranteed investment certificates (GICs). The bank up the street was paying 4.25%. She decided the extra 10 bps wasn’t worth the hassle of dealing with a second bank.”
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