Introduction
If you’re involved in finance or investing, you may have heard the term “basis points” thrown around. Basis points are a common way to measure small changes in percentage terms. For example, a change from 2% to 2.25% is a 25 basis point increase. But how do you calculate basis points? In this article, we’ll break it down for you in simple terms.
What Are Basis Points?
Before we dive into the calculations, let’s define what we mean by basis points. A basis point is one-hundredth of a percentage point. That means 100 basis points equal 1%. So, if the interest rate on a loan goes up by 50 basis points, that’s a half a percentage point increase.
Calculating Basis Points
To calculate basis points, you need to know two percentages: the starting percentage and the ending percentage. Let’s say you have an investment that starts at 5% and then increases to 5.5%. To calculate the number of basis points, you would subtract the starting percentage from the ending percentage and then multiply by 100. Here’s the formula: (ending percentage – starting percentage) x 100 = basis points In our example, the calculation would be: (5.5% – 5%) x 100 = 50 basis points So, the investment increased by 50 basis points.
Examples
Let’s look at a few more examples to help solidify the concept of basis points. Example 1: The interest rate on a loan increases from 3.25% to 3.35%. How many basis points did it increase? (3.35% – 3.25%) x 100 = 10 basis points Example 2: An investment starts at 8.5% and then decreases to 8.25%. How many basis points did it decrease? (8.25% – 8.5%) x 100 = -25 basis points Note that the result is negative because the investment decreased.
Basis Points vs. Percentage Points
It’s worth noting that basis points are not the same as percentage points. Percentage points are the difference between two percentages, whereas basis points are one-hundredth of a percentage point. If the interest rate on a loan increases from 5% to 6%, that’s a 1 percentage point increase, but it’s also a 100 basis point increase.
Why Use Basis Points?
Basis points are commonly used in finance and investing because they make it easy to talk about small changes in percentage terms. For example, if you’re discussing the performance of a stock, you might say that it increased by 50 basis points instead of saying it went up by 0.5%. Using basis points can help avoid confusion and make discussions more precise.
Conclusion
Calculating basis points is a simple process that can be useful in finance and investing. By understanding the concept of basis points and how to calculate them, you’ll be able to communicate more effectively with others in the industry. Remember, one basis point is one-hundredth of a percentage point, and you can calculate the number of basis points by subtracting the starting percentage from the ending percentage and then multiplying by 100.
