What does Basis point mean?

The basis point is the smallest calculation of quoting the yield, either on a note, bond or any other debt instrument. The numeric value of a basis point is one hundredth of a percent, while 1 percent of a yield is equal to one hundred basis points. For instance, if the interest rate is 5% then the basis point of this is 50 points higher than the one where the interest rate is 4.5%. In a similar situation, if the spread between the offer price and bid price of a specific bond is 50 basis points, then that means whoever invested in the bond must pay 0.5% more to buy it than the investor could realize from selling the bond.

The basis point is used to denote any kind of change in any financial instrument. It is commonly used to calculate changes in an interest rate, an equity index and the yield of any fixed income security.