Facts You Need to Know about BPS or Basis Points
A BPS or basis point, also known as pip’, bp’ or bip’, is 0.01%, 0.0001 or 1/100th of a percentage
Normally,this term is used as a function of dividend by the community with fixed income as well as stock investors to
discuss interest rates and yields of their investments.
Basis points and yield curves
A yield curve is the series of maturities of fixed income from a source like central bank.
However the difference between the yield of short maturity and longer maturity can be expressed in terms of basis points.
A large difference in the yields can be shown as steep or wide spread whereas smaller difference is shown in flat or narrow spread.
At times, shorter maturity can be risky if the yield on shorter maturities is higher than the longer maturities.
Consumer rates and basis points
Usually basis points are used to compare consumer rates like rates of credit card,
prime rates and rates of mortgage. Any change in its shows the change in
the consumer rates because usually they are less than a point percentage.
For instance, 50 bps = 0.5% or a fraction of a percentage point like 137.5 bps = 1 3/8%.
Moreover, often these rates are determined as a risk function in comparison to a base rate
like the yield of 10-years Treasury note or the rate of Federal Funds. The rate of Federal
Funds plus 300 bps or 3% is typically considered as the prime rate since 1994. For clarity the
difference between the yield of 10-year Treasury notes and 10-year mortgage rate is usually
expressed in basis points while comparing them with each other.
Written By : YOUSSEF J A ALMEER
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