1. What is Basis Point (BP)?

A basis point (bp) is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equal to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

2. How Does the Calculator Work?

The calculator uses the basis point formula:

Where:

• New Interest — The current or new interest rate in decimal form
• Old Interest — The previous or old interest rate in decimal form
• 10000 — Conversion factor from decimal to basis points

Explanation: The difference between two rates is multiplied by 10,000 to convert the decimal difference into basis points.

3. Importance of Basis Points

Details: Basis points are commonly used in finance to describe changes in interest rates, bond yields, and other percentages in financial instruments. They provide a precise way to discuss small percentage changes without ambiguity.

4. Using the Calculator

Tips: Enter both interest rates in decimal form (e.g., 0.025 for 2.5%). The calculator will show the difference in basis points.

5. Frequently Asked Questions (FAQ)

Q1: Why use basis points instead of percentages?
A: Basis points eliminate ambiguity when discussing small changes in rates. Saying "10 bps" is clearer than "0.1%" which could be misheard as "1%".

Q2: How are basis points used in bond markets?
A: Bond yields are typically quoted in basis points. A change from 3.25% to 3.45% would be described as a 20 bps increase.

Q3: What's the difference between bps and percentage points?
A: A percentage point is 1% (100 bps). Basis points allow for more precise measurement of smaller changes.

Q4: Can basis points be negative?
A: Yes, if the new rate is lower than the old rate, the result will be negative basis points.

Q5: How precise are basis point calculations?
A: Basis points typically measure to one decimal place (e.g., 12.5 bps), allowing for very precise rate change measurements.