Glossary of Terms

Basis Point 2018-08-29 08:00:00

Basis Point

The basis point is a common unit of measurement used in the field of finance. One basis point is equal to 1/100th of 1% (0.01%). Basis points are used primarily for noting changes in interest rates, yields, and equity indexes, and are used by analysts to minimize confusion when discussing percent changes in financial instruments. 

For example, suppose your mortgage is currently priced with an 8% rate of interest. If your bank tells you that there will an increase of 10% on your rate in the next year, concerns may evolve around whether or not the bank means your new rate will be 8.8% or 18%. By alternatively saying that your rate will increase by 80 basis points, however, you can now be sure of your new rate.