basis point: Definition from Answers.com

A basis point (often denoted as bp, bps or ‱; rarely, permyriad) is a unit that is equal to 1/100th of 1%. It is commonly used to denote the change in a financial instrument, or the difference (spread) between two interest rates; although it may be used in any case where percentages are used, it is used for convenience when quantities in percentage points are small. It also avoids the ambiguity between relative and absolute discussions about rates: does a "1% increase" in a 10% interest rate mean that it goes from 10% to 10.1%, or to 11%?

The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. The type of interest rate has to be specified (e.g., bond yield, zero-coupon yield, Act/360 money market rate, Act/365 money market rate, etc).

Since certain loans and bonds may commonly be quoted in relation to some index or underlying security, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest of 0.50% above LIBOR is said to be 50 basis points over LIBOR.

Examples

A rate change from 5% to 6%, reflects a change of 1% or 100 basis points (Note 5% to 6% is actually a 20% increase: by using basis points, it is clear that the change in rate as an absolute number is being discussed.)

A rate change from 6.7% to 6.9% reflects a change of .2% or 20 basis points. A rate change from 2.75% to 3.20% reflects a change of .45% or 45 basis points

Related units

• Percentage point.
• Percent (%) 1 part in 100.
• Permille (‰) 1 part in 1000.
• Parts per million (ppm).
• Parts per billion (ppb).
• Parts per trillion (ppt).