What is a Basis Point

In simple words basis point means 100 basis point = 1 percent of any measured quantity. It is mostly used in financial calculation. It helps to provide precision when the using measurement is in percentage. It also describes the smallest difference between two rates of return and change in interest. There is a difference between basis point and percentage point where percentage point break a whole in one hundred parts, can always expressed in basis point whereas basis points are used for describing the difference between two percentage points. The basis points are very clear in their meaning hence; it has a great advantage to use. Though there is nothing as small as basis point, but when dealing with large sum of money these basis points are very sizable.

Basis point are the best way to express a spread, which is used in the financial work for showing the difference between the buying and selling price of something or the difference in return which is produced by two different by two different investments. Basis point gives a clear and quick picture of the difference. There are some loans whose interest rates are not fixed, such type of interest rates are often determined by X basis point. The borrower will know the exact interest rate, even the rate is not fixed because the basis point offers the clarity and precision calculations in interest rates. The most common benchmark for lending is the London Interbank Offered Rate (LIBOR), which changes regularly.  Basis points are also convenient for discussing margins because the percent changes are mostly small. Small changes like operational gearing and financial gearing are important to discuss because it can have big effects on the bottom lines.

There are certain steps to calculate basis point changes:

  • As per the rules the lower basis point has to be subtracted from the higher one, e.g. – suppose that if the change is made from 55 basis point to 10 basis point, the change is 45 basis point.
  • Then you have to convert the difference into decimal that is dividing 45 basis point by 100, you will get 4.5 percent.
  • Change the variations of the percentage dividing the basis point change total by 10,000 that is 0.0045, which is the decimal number of revenue collection.
  • Multiply a decimal figure by an investment amount to get a revenue difference.

The best role of basis points comes into consideration when you are going to buy or sell anything as it will let u know the clear cut difference between both. Using the concept of basis point will surely help you in getting extra benefits.