How Does A Basis Point Work?
A basis point is used to describe changes in the performance of various financial instruments. Because basis points describe a percentage change as minimal as 0.01%, you can describe small or large changes in things like interest rates without the need for the mental gymnastics used to deal with fractions or decimals.
To get a better idea of how they work, see this conversion table.
Basis Points

Percentage

Decimal

1

0.01%

0.0001

5

0.05%

0.0005

10

0.1%

0.001

50

0.5%

0.005

100

1%

0.01

1,000

10%

0.1

10,000

100%

1

If you’re looking to understand just how small a basis point is, it takes 100 of them to make up 1%. However, when you start talking in terms of dollars and cents, these can make a big difference. We’ll have an example of the impact even a slight difference can have on your mortgage later on.
How To Calculate Basis Point Conversions
To better understand the way the math works, let’s run through some quick story problems. I know that reminds you of math class. Don’t worry. This won’t be on the test.
Your Home Loan Expert tells you interest rates have moved up 10 basis points in the last 2 days. What’s the percent difference?
In order to convert from basis points to a percentage, you divide 10 by 100. If you don’t have a calculator, just move the decimal two places to the left.
10
___ = 0.1%
100
Now let’s say you’re tracking the stock market and you read that the stock market is up 0.5% on the week. What would that be in terms of basis points?
In order to come to the answer, you multiply 0.5 by 100. You can also move the decimal point two places to the right.
0.5 × 100 = 50