Finance term
Basis Points (bps)
Also known as: bps, basis point, bp
Definition
A basis point (bps) is one one-hundredth of one percent (0.01%). Used universally in finance to express small changes in interest rates, spreads, and yields without ambiguity — '25 bps' means 0.25%, '100 bps' means 1.00%.
Detailed explanation
Basis points are the standard unit of measurement for interest rate changes in professional finance because percentage terms create ambiguity. If a rate goes from 5% to 6%, is that a 1-percentage-point increase or a 20% increase (relative)? In basis points, it's unambiguously a 100 bps increase. The Federal Reserve and all major central banks communicate rate decisions in basis points — a '25 bps rate cut' is an unmistakable 0.25% reduction in the Fed Funds target rate.
The Federal Reserve H.15 release (https://www.federalreserve.gov/releases/h15/) tracks key reference rates and yield spreads in basis points, including the Fed Funds effective rate, Prime Rate, SOFR, Treasury yields, and interest rate swaps. These form the benchmarks over which lending spreads are quoted.
For SMB borrowers, basis points appear in: (1) Loan pricing quotes ('Prime + 275 bps'). (2) Rate comparison across multiple lenders. (3) Prepayment penalties (e.g., 'make-whole premium is the present value of remaining payments discounted at Treasury + 50 bps'). (4) SBA guarantee fee schedules, which are expressed in basis points of the guaranteed portion. Understanding bps is essential for accurate comparison of loan cost offers from different lenders.
Conversion table: 1 bps = 0.01% | 25 bps = 0.25% | 50 bps = 0.50% | 100 bps = 1.00% | 300 bps = 3.00% | 500 bps = 5.00%.
◈ Worked example
- Federal Reserve raises Fed Funds rate by 25 bps — from 5.25% to 5.50%. Prime Rate (historically Prime = Fed Funds + 3.00%) moves from 8.25% to 8.50%. Variable-rate business loans tied to Prime reprice up by 25 bps.
- Lender A quotes Prime + 200 bps; Lender B quotes 10.50% fixed. With Prime at 8.50%, Lender A = 10.50% — identical on day one, but Lender A floats with rate moves and Lender B is fixed.
- SBA 7(a) guarantee fee for a $500K loan with 10-year maturity: SBIA sets fee at 300 bps of the guaranteed portion (75% of $500K = $375K). Fee = $11,250 upfront.
Common questions
The most-asked questions about Basis Points (bps) — answered straightforwardly.
Why do finance professionals use basis points instead of percentages? +
Basis points eliminate ambiguity in rate change descriptions. 'Rates rose 1%' is ambiguous — does that mean from 5% to 5.05% (a 1% relative change) or from 5% to 6% (a 1 percentage-point absolute change)? 'Rates rose 100 basis points' unambiguously means the rate increased by 1 full percentage point in absolute terms. The Federal Reserve, CFPB, and all regulated lenders use bps as standard (federalreserve.gov/releases/h15/).
How many basis points is a 0.25% rate change? +
25 basis points. One percentage point = 100 basis points. So: 0.25% = 25 bps, 0.50% = 50 bps, 0.75% = 75 bps, 1.00% = 100 bps. For mental math: multiply the percentage by 100 to get bps (0.25 × 100 = 25 bps), or divide the bps number by 100 to get percentage (25 ÷ 100 = 0.25%).
What does 'Prime plus 250 bps' mean on a loan offer? +
It means your interest rate is the Prime Rate (published daily by the Federal Reserve at federalreserve.gov/releases/h15/) plus 2.50 percentage points. If Prime is 8.50%, your rate is 11.00%. If the Fed raises rates by 25 bps, Prime goes to 8.75% and your rate goes to 11.25% — the spread stays fixed, but your absolute rate floats with the benchmark.
Further reading
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