Basis Points (BPS)

What Are Basis Points (BPS)?

Basis Points (BPS) are a term used in finance for measurement, which is equal to 1/100 of a percentage point. It is generally used concerning securities where the percentage difference is less than 1% but still significant, such as interest rates (IR) and debt-related securities. 

It is pronounced as “bips” and abbreviated to “bps”, “bp” (singular), and “bips”. The term “basis” comes from the base movement between two percentages or the spread between two interest rates (IRs).

The examples of change in basis point are:

• An increase in bond yield from 8.25% to 8.35% is an increase of 10 bps.
• If the Federal Reserve raises rates from 1.65% to 1.85%, it is said to be an increase of 20 basis points (bps) of federal rates.
• When the price of an Exchange Traded Fund (ETF) has jumped in price by 2.6% due to favorable event anticipation, it is considered an increase of 260 bps.

Take a look at the table below to understand what the particular percentages stand for specific BPS:

Price Value Of A Basis Point (PVBP)

The Price Value of a Basis Point (PVBP) measures the absolute value of the change in the price of a bond for a one-basis-point change in yield. It is another way to measure interest-rate risk, like duration, which measures the percent change in a bond price given a 1% change in rates. 

PVBP is a special case of dollar duration. Instead of using a 100 bp (1%) change, the price value of a basis point simply uses a 1 bp (0.01%) change.

It does not matter whether rates increase or decrease significantly because such a small change in rates will have approximately the same effect in either direction. It is also referred to as DV01 or the dollar value change for a 1 bp move.

As an example of PVBP, consider that for every percent change in bond yield, the price of the bond changes by $20. In this case, the dollar duration is $20, and the PVBP is $0.20 (calculated as $20/100).  

The conversion to and from a percentage can be easily calculated by applying the information below:

• For bps to percentage, divide by 100
• For the percentage to bps, multiply by 100

Or try out this calculator for free.

Basis Points Vs. The Percentage Vs. PIPs

This convention reduces confusion when talking about percentages. For example, consider the following sentence:

“There was an increase of 5 percent on the yield of the bond.” 

What does this mean? Assuming that the initial yield of the bond was 10%, it is ambiguous whether the bond is now priced at 10.5% or 15%. 

What if we had phrased the same sentence as “There was an increase of 50 bps on the yield of the bond.” This removes any ambiguity as it communicates that the yield on the bond is 10.5% and not 15%.

A “basis point” (BP) is a standardized measure equal to 1/100th of a percentage point. It is used in various financial contexts, including fixed-income markets and interest rate discussions.

A “pip” (Price Interest Point) is commonly used in foreign exchange markets to represent the smallest price movement of an exchange rate based on market convention. The value of a pip can vary depending on the currency pair.

Pips and basis points are not interchangeable, and their usage depends on the specific financial market and context. Pips are prevalent in forex (FX) markets, while basis points are used in various financial instruments and discussions.

Let us take a look at the table below to understand the difference better:

What Instruments Does bPS Apply To?

bps is primarily used concerning yields and interest rates in the context of fixed-income assets. However, they may also be used to signify a change in the price of other assets, such as equity stocks.

Examples of instruments where bps is applied:

• Government Bonds
• Treasury Bonds
• Credit Default Swaps (CDS)
• Corporate Bonds
• Interest Rate Swaps (IRS)
• Common Stock
• Mortgage Loans
• Options
• Futures
• Management Expense Ratios (MERs) of investment funds

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Bond Tranches
• Calculating Yield on Debt
• Fixed Income Risks
• Interest Rate
• Yield to Maturity (YTM)