# Basis Point: Definition, Value & Conversion

Instructor: Karin Gonzalez

Karin has taught middle and high school Health and has a master's degree in social work.

In this lesson, you will learn the definition and value of a basis point. You will also learn how to convert a basis point to a percentage and vice versa. Following this lesson will be a brief quiz to test your new knowledge.

## Definition and Value

1/100th of 1%!!! That's how small a basis point is! If you find it easier to see in decimal form, it is 0.0001. As a fraction, that would translate to 1/10,000. That's tremendously small! Now you may be wondering what is the significance of such a small number?

On Wall Street, this tiny thing called a basis point is also called a BP, pronounced 'bip.' It is a unit of measurement that is equivalent to one hundredth of 1%, and denotes increases or decreases in the financial world; most commonly in stocks, bond yields and interest rates. Just a tiny change in the stock, bond and interest rates could mean a LOT of money for a consumer or investor!! That is why it is very important to use such a small unit of measurement in the financial world.

## Real-Life Example

It was mentioned earlier that just one basis point could mean a lot of money! If, for example, we're talking about a 10 million dollar bond, just one basis point change would equal \$1,000!

Let's take Apple Inc., for example. Most people know that Apple is a well-known manufacturer of electronics, such as the iPhone. On April 27, 2015, Apple reported earnings that beat market estimates, primarily driven by the growth of iPhone sales in China. This caused the stock to appreciate in one day by 230 basis points. That's 2.3%! For Apple, Inc., this translated to \$3/share of Apple in one single day. Now, \$3 may not seem like a lot if you own 1 share of Apple, Inc. But the CEO of Apple, Inc., Tim Cook, owns 950,767 shares of Apple, Inc.! If we do the math, his net worth increased by \$2,852,301 in one day! That's almost \$3 million in one day! Must be nice to be Mr. Cook!

## Conversion of a Basis Point

Imagine that the Federal Reserve System increased the interest rate 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 a basis point, multiply the percentage by 100.

See the image below for examples of basis point to percentage (and vice versa) conversion. It is very simple!

## Why Exactly Do We Use Basis Points?

You may be wondering by now why use basis points when using percentages just seems easier and more practical? The reason is that using percentages can sometimes be confusing. For example, let's look at a situation regarding the Federal Housing Finance Agency (FHFA) mortgage loan interest rate:

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