The BPS full form in banking stands for Basis Points. It serves as a standard unit for measuring interest rates and other ratios. Basis points, also known as BPS, indicate changes in the value or price of financial assets. These metrics are useful for representing changes in interest rates in savings accounts, investments, etc.
To learn more in detail about basis points, keep reading this blog.
A basis point, or BPS, equals 1/100th of 1% or 0.01%, and in decimal form, it is 0.0001 (0.01/100).
The term ‘basis’ in basis point refers to the base difference between two percentages or the spread between two interest rates. Since these changes are usually small but significant, a basis point is used as a fraction of a per cent. It is widely used to calculate changes in the interest rates of financial instruments.
Basis points represent a percentage of 1%. One basis point equals 0.01% or 0.0001 in decimal form. To change basis points to a percentage or the other way around, you need to multiply or divide it by 100.
Following is the formula to convert basis points to percentage
Basis Points ÷ 100 = Percentage
For example, if an interest rate is set to increase by 129 basis points, you can convert it to a percentage by using the equation:
129 Basis Points ÷ 100 = 1.29%
You can also do this quickly in your head by moving the decimal point two places to the left (from 129.0 to 1.29).
The following table shows the different percentages of different BPS:
Basis Points 
Percentage 
10,000 
100% 
1,000 
10% 
100 
1% 
50 
0.5% 
10 
0.1% 
1 
0.01% 
To understand BPS meaning more simply, let us take an example.
Suppose you invested in a government bond that has an interest rate of 12.50%. After a few months, the interest rate on that bond falls to 12.25%. You can calculate the change in the interest rate by applying the formula:
Percentage x 100 = Basis Points
0.25% X 100 = 25 Basis Points
Basis points are used in the following instruments:
Issued by federal or state governments, Treasury bonds use basis points for purposes such as communicating the rate of interest and analysing the change in the rate of interest.
Corporate bonds are debt instruments issued by companies to raise funds. Basis points measure changes in interest or coupon rates.
Interest rate changes on credit cards can be communicated and analysed using basis points.
In stock market derivatives like futures and options, basis points measure the changes in return rates.
Now that you have learnt basis points meaning, let's have a look at some benefits of using the basis points system:
The concept of a basis point, as a measurement, plays an important role in finance for several reasons:
A basis point offers a precise way to express changes in financial metrics. It allows for accurate measurement of interest rates or yield changes, which significantly affect financial investments.
A BPS provides a consistent method for comparing financial metrics across various investments. This is essential for investors to evaluate the performance of different investment options.
In financial markets, basis points measure the spread between different investments. This helps traders spot profit opportunities by buying low and selling high.
Lenders often express interest rates in basis points. This helps borrowers compare loan options to zero in on the most costeffective option.
Basis points help measure the risk of various investments. By understanding how interest rate or yield changes might impact them, investors can make better decisions about their portfolio allocations.
Using BPS is a clear and efficient way to measure changes in interest rates for loans and debt instruments. It helps to clearly communicate the rate changes and their impact.
As an investor or market analyst, you should use basis points instead of percentages to effectively communicate value changes.
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