Basis Point Explained

Basis Point Explained

A basis point, commonly abbreviated as BPS, BP, or bps, is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% or 0.0001 in decimal form. In the context of interest rates, if a rate increases from 2% to 2.5%, it has risen by 50 basis points. This standard measure provides precision in illustrating changes in financial rates and yields.

Basis Points in Financial Markets

Basis points play a critical role across various facets of the financial markets, from interest rates to bond pricing, and significantly in foreign exchange (forex) trading.

Role of Basis Points in Interest Rates

Central banks worldwide utilize basis points to communicate changes in interest rates. A shift in a central bank’s key interest rate, even by a few basis points, can have significant implications for borrowing costs, asset prices, and overall economic performance. For example, if the U.S. Federal Reserve increases interest rates by 25 basis points, it means the rate has risen by 0.25%.

Basis Points and Bond Pricing

Basis points are integral to bond markets, primarily in expressing yield changes. Bonds, as fixed-income securities, pay an amount of interest over a specific period. The interest rate, or yield, of a bond, is often discussed in terms of basis points. For instance, if a bond yield falls from 3.50% to 3.25%, it has dropped by 25 basis points.

Basis Points in Forex Trading

In forex markets, basis points, also known as ‘pips,’ are used to express changes in currency exchange rates. A change in an exchange rate from 1.3500 to 1.3501 represents a rise of 1 basis point. Forex traders monitor these tiny fluctuations to make profitable trades.

Basis Points in International Money Transfers

In the sphere of international money transfers, basis points are paramount as they significantly influence transaction costs and exchange rates.

Influence of Basis Points on Transaction Costs

Financial institutions and international money transfer services often levy charges on international transfers as a percentage of the transfer amount. A slight change of a few basis points in these charges can substantially impact the total cost of transferring money, especially for high-value transactions. For example, an increase in fees from 0.75% (75 basis points) to 1.00% (100 basis points) on a transfer of $10,000 would raise the cost by $25.

Impact of Basis Point Changes on Exchange Rates

Fluctuations in currency exchange rates are measured in basis points. For individuals and businesses involved in international money transfers, even a minor change of a few basis points in the exchange rate can lead to significant differences in the amount of money received in the target currency. For instance, a decline of 50 basis points in the USD/EUR exchange rate could decrease the Euro amount received from a $1,000 transfer by approximately €5, depending on the precise exchange rate.

Understanding and Calculating Basis Points

Given the importance of basis points in finance, a solid understanding and the ability to calculate them can be invaluable.

Conversion of Basis Points to Percentages

The conversion of basis points to percentages is straightforward. Since one basis point is 0.01%, a quoted value in basis points can be converted to a percentage by dividing by 100. For example, 50 basis points equate to 0.50% (50 ÷ 100), and 200 basis points correspond to 2.00% (200 ÷ 100).

Practical Examples of Basis Point Calculation

Let’s consider a real-world scenario. Suppose the interest rate on a savings account increases from 1.25% to 1.45%. The rise in basis points can be calculated by subtracting the original rate from the new rate and multiplying by 100 (to convert the decimal to basis points), i.e., (1.45 – 1.25) * 100 = 20 basis points.

Historical Examples of Basis Point Changes Affecting International Money Transfers

An understanding of historical events where basis point shifts played a crucial role can underscore their significance in international money transfers.

For instance, during the European Sovereign Debt Crisis in 2011-2012, the interest rates on government bonds of heavily indebted countries like Greece, Italy, and Spain soared by hundreds of basis points. This rise increased the costs of servicing their debts significantly. The impact rippled through forex markets, leading to a devaluation of the Euro. Individuals or businesses transferring money from Euros to another currency during this period would have received less of the target currency.

Importance of Monitoring Basis Point Changes

Awareness and monitoring of basis point changes are vital for individuals and businesses involved in international money transfers, providing insights into market conditions and aiding informed decision-making.

Impact on Individuals and Businesses Involved in International Money Transfers

Basis point changes in exchange rates can materially affect the value individuals or businesses get from their international money transfers. Regular monitoring can help them choose an optimal time to make a transfer, potentially saving costs.

Tracking Basis Point Changes

Several financial news sources and websites provide updates on basis point changes in interest rates and exchange rates. Following these sources and understanding the potential impact of these changes can help in planning international money transfers more effectively.

Basis Points and Central Bank Policies

Central banks, such as the Federal Reserve in the US or the European Central Bank, often use basis points to describe changes in their monetary policy. These changes can significantly impact currency exchange rates and subsequently affect international money transfers. For example, if the Federal Reserve raises interest rates, it may lead to an appreciation of the US dollar, affecting the amount received in an international money transfer.

Hedging Against Basis Point Fluctuations

Given the impact of basis point fluctuations on international money transfers, it’s crucial to understand strategies to hedge against these risks. Financial instruments like forward contracts, futures, options, and swaps can be used to mitigate the risk of adverse changes in exchange rates.


Understanding the concept of basis points is fundamental for anyone dealing with financial markets, especially those involved in forex trading or international money transfers. While they may seem insignificant at first glance, changes of even a few basis points can have substantial financial implications. By monitoring these shifts and understanding their impacts, one can make more informed decisions about when and how to conduct international money transfers.


  1. Can a change in basis points affect the fees on my money transfers?

    Yes, basis point changes can affect fees on international money transfers. Financial institutions often calculate transaction fees as a percentage of the transfer amount. Hence, a shift in basis points can result in an increase or decrease in fees.

  2. How can I stay updated about basis point changes?

    Several financial news sources, websites, and apps provide real-time updates on basis point changes in interest rates and exchange rates. Staying informed through these sources can help you make better decisions about when to conduct international money transfers.

  3. What role do central banks play in basis point changes?

    Central banks can influence basis point changes through their monetary policies. When central banks alter interest rates, it can cause shifts in currency exchange rates, affecting the value of international money transfers.