Glossary entry
A basis point is one hundredth of a percentage point, equal to 0.01%. It is used to describe changes in interest rates, yields, fees, or spreads without confusing absolute percentage-point changes with proportional changes. One hundred basis points equal one percentage point, regardless of the starting rate or the amount invested.
Illustrative example
A rate rising from 4.00% to 4.25% increases by 25 basis points. Its proportional increase is 6.25%, which describes a different comparison.
What to consider
Do not confuse basis points with percentage changes. Apply the rate to the correct notional amount and time period when calculating money.
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