In this article, you will learn what is a basis point and what does 50 basis point mean. A basis point is a common unit of measure for interest rates and other percentages in finance. Basis points are typically expressed with the abbreviations bp, bps, or bips. The word basis comes from the base move between two percentages, or the spread between two interest rates.
What is a Basis Point?
The word basis in the term basis point comes from the base move between two percentages, or the spread between two interest rates. Since the changes recorded are usually narrow, and because small changes can have outsized outcomes, the basis is a fraction of a percent .
The basis point is commonly used for calculating changes in interest rates, equity indices, and the yield of a fixed-income security. It is common for bonds and loans to be quoted in terms of basis points.
What does 50 Basis Point mean?
One basis point is equal to 1/100th of 1%, or 0.01%. In decimal form, one basis point appears as 0.0001 (0.01/100). Basis points (BPS) are used to show the change in the value or rate of a financial instrument, such as 1% change equals a change of 100 basis points and 0.01% change equals one basis point. So, 50 Basis Point means 0.5% of change.
Special Considerations
By using basis points in the conversation, traders and analysts remove some of the ambiguity or confusion that can arise when talking about percentage moves. For example, if a financial instrument is priced at a 10% rate of interest and the rate experiences a 10% increase, it could conceivably mean that the financial instrument is now 11% (0.10 x (1 + 0.10) or it could mean that it is now 20% (10% + 10% = 20%).
The use of basis points, in this case, makes the meaning clear. If the instrument is priced at a 10% rate of interest and experiences a 100 bp move up, its rate would then be 11%. If the instrument experiences a 1,000 bp move up, it would be 20%.
Price Value of a Basis Point
The price value of a basis point (PVBP) is a measure of the change in the absolute value of the price of a bond for a one basis point change in yield. This may also be referred to as DV01, or the dollar value change for a one bp move. It is another way to measure interest rate risk and is similar to duration, which measures the percent change in a bond price given a 1% change in rates.
PVBP is just a special case of dollar duration. Instead of using a 100 basis point change, the price value of a basis point simply uses a one basis point change. It does not matter if there is an increase or decrease in rates because such a Small move in rates will be about the same in either direction.
Basis Points and Investments
Basis points are also used when referring to the cost of mutual funds and exchange-traded funds (ETFs). For example, a mutual fund's annual management expense ratio (MER) of 0.15% will be quoted as 15 bps.
When funds are compared, basis points are used to provide a clearer understanding of the difference in their costs. For example, an analyst may state that a fund with 0.35% in expenses is 10 basis points lower in cost than another with an annual expense of 0.45%.
Since interest rates don't apply to equities, basis points are less commonly used as terminology for price quotes in the stock market. Instead, stock prices are quoted in dollars and cents.
Bottom Line
Traders will use basis points to refer to the change in value of a security or when comparing the rates on different securities. So, it is needed to know what is a basis point and what does 50 basis point mean.
