Interest Rates/Basis Points

An Interest Rate is the price a borrower pays for the use of money, and the return a lender receives for deferring the use of funds, by lending it to the borrower.

Interest rates are typically set by either national governments (see Federal Funds Rate) or influenced by market forces, or both, and can vary widely. For example, from 1954 to 2008 the United States Federal Funds rate has fluctuated between about 1% and 19%.

Interest rates are typically expressed as a percentage rate over the period of one year.

A Basis Point is a unit that is equal to 1/100th of 1%, and is used to denote the changes in interest rates.  It can be summarized as: 1% change = 100 basis points, and 0.01% = 1 basis point.

For example, when a bond’s yield increases from 5% to 5.5%, it means the yield has increased by 50 basis points.  If interest rates rise 1%, they have increased by 100 basis points.

The basis point reference is primarily for calculating yields and interest rates, but it may also refer to the percentage of change in the value of an asset such as a stock. If a stock index has moved up 134 basis points in the day's trading, it means there’s been a 1.34% increase in the value of the index.

To convert basis points a percentage format, simply multiply the amount of the basis points by 0.0001.  The results will be a percent figure in decimal form.

Conversely, you can figure out the number of basis points from a number presented as a percent by dividing the percent (in decimal form) by 0.0001.

See alsoFederal Funds Rate.