The term basis point has its origins in trading the basis and spread between two interest rates. The basis point is used concerning interest rates and to the mean of one-hundredth of one percentage point. For example, the treasury note yielded 6.60% this morning, down four basis points from last week. The related term to the basis point is permyriad. Which also means one-hundredth of one per cent. The changes in interest rates are very often stated in basis points. If the interest rate of 10% is increased by one bp, it is changed to 10.01%.
A basis point is also known as bps or bips, which is a unit of measure used in finance to describe as the percentage change. It is the value of the financial instruments or the changing of the rates in an index or other benchmark. As mentioned before, the basis point is the equivalent to 0.01%, or it is 0.0001 in decimal form. So, similarly, the basis point is 1.5 basis points and is equivalent to the 0.015%. However, in most cases, basis points refer to the changes in the interest rates. And the bond yields.
A basis point in the real estate sector is used to denote the small changes relevant to the financial measures. So, the smaller the numerical changes, it gets easier to express it on the base point and to state that the change should be in percentage. So, we can even go for the smaller, which has the basis points and talk of, say, three basis points which are to indicate the 0.03% of the per cent change. These basic points generally come in use while describing the changes in interest rates.
For instance, Basis points also tend to avoid the ambiguity while discussing the absolute and relative interest rates. So, for example, if there the rate of interest increases from 11% to 12%, some people may call it the absolute method and thereby increase 1% of the interest rate. In contrast, other people can use this comparative method and claim that there is a 9.09% increase in the interest rates. So, basis points mainly help the curbing of this confusion by saying that the rate of interest can increase by 100bps.
When it comes to using basis points in the financial instruments, it has many tools such as Corporate bonds, treasury bonds, credit derivatives, options and future, debt securities, equity securities, interest rate derivatives, etc.
