A unit equal to 1/100th of 1% and used to represent the modification in a financial maneuver. The basis point is normally used for calculating changes in interest charges, equity catalogues and the yield of a fixed-income safety. The relationship between percentage variations and basis points can be summarized as follows: 1% change equals 100 basis points, and 0.01% equals 1 basis point. A bond whose profit increases from 5% to 5.5% is said to rise by 50 basis points; or interest rates that have risen 1% are said to have amplified by 100 basis points.
Hotel business example: Red Lion ‘s direct working profit for the fourth quarter of 2007 increased 19.4% to $5.8 million from the prior-year period, a 205 basis-point increase to 15.7% versus 13.6% in 2006.
Imagine that the Federal Reserve System increased the interest amount by 3%. How many basis points would this be? It would be 300 basis points! How did we do this conversion, you may ask?
In the financial world, one needs to be able to convert basis points to a percentage or vice versa. The reason is that the financial world uses both the terms ‘basis point’ and ‘percentage’ (usually meaning percentage gain or loss) interchangeably. Luckily, the conversions are quite easy:
- To convert a basis point to a percentage, divide the basis point by 100.
- To convert a percentage to basis point, multiply the percentage by 100.