How Much Is 20 Basis Points & What Does It Mean?

Twenty basis points equals 0.20%. Basis points serve as a standard unit of measurement in finance, especially when discussing small changes in rates or yields. They help communicate financial figures with precision, avoiding misinterpretations that can arise with percentage discussions.

Understanding Basis Points

One basis point, often abbreviated as “bp” or “bps,” represents one-hundredth of one percent, equivalent to 0.01%. This unit is used to express small changes in financial metrics like interest rates, yields, or fees. Basis points prevent ambiguity when discussing percentage changes, particularly when differentiating between a change of a percentage and a change in percentage points. For instance, if an interest rate increases from 4% to 4.5%, it is a 50 basis point increase, avoiding confusion about whether it is a 0.5% increase or a 0.5 percentage point increase.

Calculating Basis Points

Converting basis points to a percentage is a straightforward process. Since one basis point equals 0.01%, you can convert a given number of basis points to a percentage by dividing that number by 100. For example, 20 basis points converts to 0.20% (20 ÷ 100 = 0.20%). Similarly, 50 basis points would be 0.50% (50 ÷ 100 = 0.50%).

To convert a percentage into basis points, the reverse operation is applied: multiply the percentage by 100. For instance, if an interest rate is 1.50%, this is equivalent to 150 basis points (1.50% x 100 = 150 basis points).

Common Uses of Basis Points

Basis points are widely used across various segments of the financial world to convey precise changes. Central banks, like the Federal Reserve, frequently announce adjustments to benchmark interest rates in terms of basis points. For example, a “25 basis point rate hike” indicates a 0.25% increase in the interest rate.

In the bond market, basis points are essential for quoting changes in bond yields. A bond yield that moves from 7.45% to 7.65% is described as a 20 basis point increase. Mortgage rates are also often adjusted or quoted in basis points, reflecting small but significant shifts in borrowing costs. Furthermore, investment fees, such as the expense ratios for mutual funds or exchange-traded funds (ETFs), are commonly expressed in basis points. For instance, an expense ratio of 25 basis points means the fund charges 0.25% of the assets annually.