Basis point

A basis point is one-hundredth of one percent (0.01%). For example, the difference between a 4.00% interest rate and a 4.25% rate is 25 basis points. One hundred basis points equals one full percentage point; that is, a 1.00% interest rate is comprised of 100 basis points.

A basis point is the smallest amount used to quote an interest rate, usually on a bond or other debt instrument. There is a basis point spread between the bid and offer prices for a bond. For example, a bond may have a bid price of 8.00% and an offer price of 7.70%, which means that an investor must pay 30 basis points more to buy a bond than could be earned from selling it.

Loans are frequently tied to a benchmark index, such as LIBOR, plus an additional interest amount that is stated in basis points. For example, a variable short-term commercial loan could be set at LIBOR plus 150 basis points.

Similar Terms

The basis points terms is sometimes contracted to "bps".

Related Courses

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