A Basis Point is defined as 1/100 of 1%, and is used to note changes in the rates of financial instruments. Basis points, or bps for short, are most commonly used in quoting interest rate and yield changes. |
If the FOMC were to change interest rates from 1.00% to 1.25%, we would say the FOMC increased rates 25 basis points (bps).
Although in consumer's day-to-day interactions with interest rates and yields, rates are usually quoted in round numbers, such as 12% APY on a credit card, or 5.15% yield on a saving account. Basis points are most relevant when quoting small changes in important rates. A relatively small change in the central bank rate or the benchmark 10-year note may be very important to investors and analysts.