Legal Definitions - basis point

A basis point (often abbreviated as bp) is a precise unit of measurement used in finance to describe very small changes or differences in interest rates, yields, or other percentages. One basis point is equivalent to one-hundredth of one percent (0.01%). Financial professionals use basis points to avoid ambiguity when discussing minute fluctuations or spreads, as stating "one percent" could be misinterpreted as a full percentage point rather than one-hundredth of a percentage point.

Here are some examples illustrating the use of basis points:

• Mortgage Rate Adjustment: A homeowner has a variable-rate mortgage. When the central bank raises its benchmark interest rate, their lender announces that the mortgage rate will increase by 25 basis points. This means the rate will go up by 0.25% (e.g., from 4.00% to 4.25%), a small but significant adjustment expressed clearly without confusion.

• Bond Market Fluctuations: A financial news report states that the yield on a 10-year government bond has fallen by 10 basis points over the past week due to increased investor demand. This indicates that the bond's annual return has decreased by 0.10% (e.g., from 3.50% to 3.40%), providing a precise measure of the market movement.

• Central Bank Policy Change: Following an economic downturn, a country's central bank decides to cut its key lending rate by 50 basis points to encourage borrowing and stimulate economic activity. This translates to a 0.50% reduction in the interest rate (e.g., from 2.00% to 1.50%), a common way for central banks to communicate policy shifts.