A basis point is 1/100th of a percent. That is, one basis point is equal to .01%. Basis points are the method for communicating interest rates in finance. If the interest rate on a loan is 4.75%, an individual would say the loan has a rate of 475 bps (basis points). This unit of measurement is especially convenient when rates of less than 1% are being discussed, as it is more convenient to say 53 bps than .53%.

When it comes to loans or financial products based on LIBOR plus a spread of basis points, they will often be denoted as L+___bps or L+___. To use the LIBOR example, a loan at L+200bps has an interest rate determined by LIBOR plus 2%. If LIBOR is 50bps, then 50+200bps means you are paying 250bps. 

AuthorIsabel Munson