Financial Definition of BPS
What It Is
How It Works
An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%. The difference between 12.83% and 12.88% is five basis points.
When you read a headline such as "The Federal Reserve cut interest rates by 25 basis points," this means that Fed lowered rates by 0.25%. In finance, basis points are often written as "bps" and prounounced "beeps" or simply "points."
Why It Matters
The term basis points avoids the ambiguity in discussions about rates. Confusion could arise in a statement such as, "a 1% increase from a 10% interest rate." The 1% increase could be interpretted as either an increase from 10% to 10.1% (relative) or 10% to 11% (absolute).
Using basis points clarifies the amount in question. The statement, "... a 100 basis point increase" would signal that the rate has increased from 10% to 11%.
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