Financial Glossary
Basis Point
A basis point (bp) is a standardized unit of measure equal to one one-hundredth of a percentage point, or 0.01%. It is used in finance to express small changes in interest rates, yields, credit spreads, fee rates, and other percentage-based values with precision. One hundred basis points equal one full percentage point. Using basis points eliminates ambiguity: saying a rate rose by 25 basis points is unambiguous, whereas saying it rose by 0.25% could be misread as 0.25 percentage points or 25% of the original rate depending on context.
Problem & Application
A campground operator refinances a $3 million mortgage. The incumbent lender quotes 7.25% and a competing bank quotes 7.00% -- a difference of 25 basis points. On a 20-year amortizing loan, that 25 bp spread translates to roughly $35,000 in total interest savings over the life of the loan. The operator's CFO presents the comparison to ownership using basis points because it precisely conveys the magnitude of the rate difference and keeps the math anchored to the same baseline. Separately, the lender charges an origination fee of 50 basis points (0.50% of the loan amount, or $15,000). Quoting both the rate differential and the fee in basis points lets the operator compare total financing cost on a like-for-like basis without unit confusion.
In Short
Basis points offer a standardized and precise way to express financial changes, ensuring clarity in professional discussions.