A basis point is one-hundredth of a percentage point. That is, 100 basis points = 1 percent, theoretically of any measured quantity. It is most often used in financial calculations and especially in describing a change in interest rates, or a small difference between two rates of return (the spread). Basis points help provide precision when using measurements expressed as percentages.

## Basis Points vs. Percentage Points

Percentage points, which break a whole in one hundred parts, can always be expressed in basis points. For example, 0.5 percent equals 50 basis points, 1.5 percent equals 150 basis points. Usually, however, basis points aren't used as mere substitutes for percentage points but for describing the difference between two percentage points: 0.5 percent is 100 basis points less than 1.5 percent or 4.55 percent is 5 basis points more than 4.5 percent, for example.

## Clarity

The main advantage of using basis points is that they are very clear in their meaning. If you said, for example, that a 4 percent interest rate "was down by 0.25 percent," that could either mean it dropped to 3.75 percent (4 - 0.25 = 3.75) or that it dropped to 3 percent, because 0.25 percent of 4 is 1, and 4 - 1 = 3. The statement wouldn't be clear. By using basis points, there is no such confusion. A drop of 25 basis points from a 4 percent interest rate can mean only one thing: the rate is now 3.75 percent.

## Size

It might not seem that something as small as a basis point, or 1 percent of 1 percent, is really necessary. But when dealing with large sums of money, a single basis point can be quite sizable. For example, each basis point on a \$10 billion loan would be worth \$1 million. Thus, when dealing with large amounts of debt, interest rates are often negotiated to the tenth or even hundredth of a basis point (1 percent of 1 percent of 1 percent) because the overall sums are so mind-bogglingly large.