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A basis point (often denoted as bp or ‱; rarely, permyriad) is a unit that is equal to 1/100th of a percentage point. It is frequently used to express percentage point changes of less than 1%. It avoids the ambiguity between relative and absolute discussions about rates. For example, a "1% increase" in a 10% interest rate could mean an increase from 10% to 10.1%, or from 10% to 11%.
It is common practice in the financial industry to use basis points to denote a rate change in a financial instrument, or the difference (spread) between two interest rates. This is partially due to the large effect of small changes to financial instruments. The basis point is also used to calculate changes in equity indexes and the yield of a fixed-income security.
Since certain loans and bonds may commonly be quoted in relation to some index or underlying security, they will often be quoted as a spread over (or under) the index. For example, a loan that bears interest of 0.50% above LIBOR is said to be 50 basis points over LIBOR.
A rate change from 5% to 6%, reflects a change of 1 percentage point or 100 basis points.
A rate change from 6.7% to 6.9% reflects a change of 0.2 of a percentage point or 20 basis points.
A rate change from 2.75% to 3.20% reflects a change of 0.45 of a percentage point or 45 basis points.
Another way (and probably the most concise expression) to approach what a basis point is: It is 1/10,000 (1/100 x 1/100) or one percent of one percent.
