Basis Point

BPS or Basis Point is a finance unit of measurement which is always equal to 1/100th of 1%.

In the finance sector or economic market, BPS is used as a method to measure interest rates, and the current yield on a fixed income such as stocks or shares, or to calculate rates and percentages for other types of financial securities.

BPS Uses

Basis Points can be used in a variety of ways, the most common are:

  • When the Federal Reserve increases interest rates.
  • If a company reports higher earnings on sales and revenue growth.
  • The difference between certain interest rates.
  • Changes in stock market indices during trading sessions.

BPS in Practice

  • Recently, the Federal Reserve announced that it will increase its base interest rates by 50 BPS or 0.50%. That means the interest rate will increase from 0.25% to 0.75% or 50 BPS.
  • If a publicly-traded company announces any sudden changes or an increase or decrease in profits or growth, stock prices on the stock market can either go up or down by BPS.

For example, Exxon Mobil announced it saw a decrease in production after the market estimated that there could be an increase. Stock prices decreased by 400 BPS or 4.0% in one-day trading.

Other financial instruments where BPS is prevalent

  • Treasury Bonds
  • Credit Derivatives
  • Mortgage Loans
  • Common Stock
  • Corporate Bonds
  • Options or Futures

Published:

05/11/2022

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