Perpetual Knowledge Bank Series: Basis Point

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Basis points, sometimes called bps or ‘bips’, are a unit of measurement used in finance, usually to describe small but significant percentage changes.

The term is commonly employed to describe changes in interest rates but can also be used when referring to changes in equity indices, fixed-income security yields or the cost of mutual funds. A basis point is a hundredth of a percentage point or 0.01%. For example, if the cash rate moves from 0.35% to 0.85%, then it has moved by 0.5% or 50 basis points.

The main reasons investors and financial services professionals use basis points or bips to communicate is to avoid ambiguity when a rate difference is less than one percent, but the amount still has material importance. For example, when discussing an interest rate that has increased from 10% to 11%, some may say there has been a 1% increase. However, it would also be correct to say that the base interest rate of 10% has increased by a further 10%. Using basis points eliminates this confusion by stating that there is an increase in the interest rate of 100 basis points.

This information has been prepared by Perpetual Investment Management Limited (PIML) and may contain information contributed by third parties. It is general information and is provided for education purposes only. It is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider a range of material, and, if you consider necessary, obtain advice from a financial or other adviser, before making investment decisions in relation to your circumstances.

The information is believed to be accurate at the time of compilation and is provided by PIML in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as result of any reliance on this information. PIML does not warrant the accuracy or completeness of any wording in this document which was contributed by a third party.