Basis Point

A basis point, abbreviated bp, means 0.01 percentage point, so 100 basis points equal one percentage point. When the news says the Fed cut by 25bp, it means a 0.25 percentage point cut.

Why bother with a separate unit? Because percent carries two meanings at once. If a rate goes from 4% to 5% and someone says it rose 1%, you cannot tell whether they mean 1% of 4%, which is 0.04 points, or a move of one full point. Saying it rose 100bp has exactly one meaning. The unit exists to remove that ambiguity entirely.

In practice, policy rates usually move in 25bp steps, with larger moves described as 50bp or 75bp. In lending, a spread of 80bp means 0.8 percentage point added on top of a reference rate, and an ETF expense ratio of 5bp is 0.05% a year.

The numbers look tiny but scale with the amount. On a $300,000 mortgage, a 25bp difference is $750 a year, and over 30 years the interest gap runs into tens of thousands. Simply being able to read basis points changes real money.