What is a basis point and what will 25, 50 or 100 basis points be equal to?
There are a lot of Forex terms that we have to deal with even in real life.
The term basis point also applies to such concepts; almost every day we hear it mentioned in financial news when it comes to changes in interest rates.
Basis point – represents one hundredth of a percentage point, so 100 basis points would equal 1%.
It characterizes the change in the new interest rate in relation to the previous one, that is, it is not the value of the rate itself, but its change.
For example, if you heard that the US Federal Reserve's interest rate on the dollar changed by 0.5% and was now 2.5%.
That is, there is a simple formula for converting basis points into percentages, for example, you heard that the US dollar rate increased by 50 basis points.
2%(initial value) + (0.01% × 50(change) = 2.50%
If you want to independently calculate the percentage of changes in basis points, then it’s even easier to do this; to do this, multiply the number of points by 0.01%:
For example, information was received that the Central Bank interest rate was changed by 25 basis points, it is easy to calculate the amount of the change in percentage%
% = 25 x 0.01% = 0.25%
Accordingly, 10 pt. = 0.1%, 50 pt. = 0.5%, and 100 pt. = 1%
It would seem that such calculations only confuse simple things, but this variable was introduced to reflect minor changes in interest rates.
It's easier to say that the interest rate changed by five basis points, not by zero point five percent.
Application of basis point in other cases
The concept of a basis point is often confused with a point in a stock quote , but as it turns out, only the name is common between them.
Since a point in a stock quote indicates a change in the last digit in the asset price record, and the quotes themselves can have from one to five decimal places.
Here completely different calculations come into play, for example, in the quote of the EUR/USD currency pair 1.09251, one point will be equal to 0.0001.