The Comprehensive Guide to

Passive Income Investing

Learn the secrets of how Paul Tracy generates over \$XXX,XXX per month in passive income!

How to Become Financially Independent Through Passive Income Investing

## What are Basis Points (bps)?

A basis point is the smallest measure used in quoting yields on fixed income products. Basis points also pertain to interest rates. One basis point is equal to one one-hundredth of one percentage point (0.01%). Therefore, 100 basis points would be equivalent to 1%.

## How Do Basis Points (bps) Work?

An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%. The difference between 12.83% and 12.88% is five basis points.

When you read a headline such as 'The Federal Reserve cut interest rates by 25 basis points,' this means that Fed lowered rates by 0.25%. In finance, basis points are often written as 'bps' and pronounced 'beeps' or simply 'points.'

## Why Do Basis Points (bps) Matter?

The term basis points avoids the ambiguity in discussions about rates. Confusion could arise in a statement such as, 'a 1% increase from a 10% interest rate.' The 1% increase could be interpreted as either an increase from 10% to 10.1% (relative) or 10% to 11% (absolute).

Using basis points clarifies the amount in question. The statement, '... a 100 basis point increase' would signal that the rate has increased from 10% to 11%.