Basis point

Interest rates are quoted in percentages, and small changes in a percentage are ambiguous in ordinary language: a move from 4% to 5% could be described as a one percent increase or a twenty-five percent increase. Basis points remove the ambiguity. That move is 100 basis points.

The abbreviation is bp, usually said “bip”. It is a unit of difference, not a unit of level: you would not say a rate is 425 basis points in ordinary usage, only that it moved by some number of them.

On a large loan the unit is not trivia. A quarter-point on a thirty-year mortgage is real money over the life of the loan; a tenth of a point on the ten-year Treasury is a normal day in that market and a change in what new borrowers pay.

A worked example

A rate moves from 4.25% to 4.50%. That is a rise of 0.25 percentage points, which is 25 basis points. It is not a 25 percent increase — as a proportion of the starting rate, 0.25 on 4.25 is about 5.9 percent. Using basis points avoids that confusion entirely, because a basis point is an absolute unit: one hundredth of one percentage point, always.

The arithmetic runs the other way too. A 50 basis point cut from 3.00% lands at 2.50%. A 100 basis point change is exactly one percentage point. On a $400,000 thirty-year mortgage, a 25 basis point difference in rate is roughly $60 a month.

How to read it in coverage

“The Fed cut by a quarter point” and “The Fed cut by 25 basis points” are the same sentence. A headline that says rates “rose 25 percent” almost certainly means 25 basis points and has mangled the unit. Yields are quoted in basis points because moves of a few hundredths of a percent matter at the scale of the Treasury market — a 10 basis point move in the ten-year yield is a normal day, not a shock.