What is a basis point?

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What is a basis point?

In the financial sector and especially on the stock exchange, you will often hear about point values. This term always refers to the basis point in comparison to the percentage point. Both are fundamentally different values.

Percentage points

One percentage point is simply one percent, understood as a value. The word percent must be distinguished from the percentage point for mathematical reasons:

If the interest rate of a savings deposit has increased from 1% to 2%, it has mathematically increased by 100% (because it has exactly doubled). At the same time, however, the interest rate has risen by one percentage point.

This is the exact difference between a given percentage (which is always relative, in any case!) and an absolute percentage value.

Both terms should not be confused, as the result could be mathematically incorrect statements. The common expression “the savings rate has increased by one percent” means mathematically that the interest rate has risen from 1 % to 1.01 % and not to 2 %.

Basis points

The base points from the fields of finance and economics then refer to the percentage points, and also represent a basically “absolute” value.

A basis point is a hundredth of a percentage point – or to put it another way: 100 basis points are one percentage point.

There is also a special symbol for the basis point, which is occasionally found in financial literature: %00

It should not be confused with the per mille sign ( %0), which has one lowercase zero less. However, one per mille is only one tenth of a percent (or consequently, a thousandth of something specific). Like a given percentage, it is a relative value.

To return to the example above:

So if we raise our interest rate from 1% to 2%, it means

  • that it has increased by 100 % (percent)
  • that it has increased by one percentage point
  • that it has increased by 100 basis points.

However, if our interest rate has been set to 1.01% due to our incorrect statement, this means:

  • that the interest rate has increased by 1 % (percent)
  • that the interest rate has increased by 0.01 percentage points
  • that the interest rate has increased by 1 basis point.

Especially in financial sciences and when it comes to stock exchange issues, one must always be careful to use the (mathematically) correct terms, otherwise misunderstandings with serious consequences can arise.

A tip on the side

If you ever have a legal dispute about default interest, you should pay attention to the exact wording: According to the law, “five percentage points above the base interest rate” are common for default interest. Five percent above the base interest rate, on the other hand, are considerably lower if taken mathematically correct. If such a case stretches over a longer period of time, the difference for those who receive the default interest can be enormous.

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