What is the full form of BPS?
BPS Full form | Basis Points (Banking Terminology) | BPS Latest Update 2021
The abbreviation BPS the full form of which is Basis Points is used in the fields of banking, lending, business, and investments. This is a common term. Sometimes, it is also referred to as BP instead of BPS.
The abbreviation BPS denotes a unit of measurement in the banking sector. This is equal to 1/100th of 1% and is used in finance to denote the percentage change in the rate.
BPS or BP is the most commonly used term for all monetary yields for fixed income security. This metric is essentially used in the case of taking loans.
Explaining “Basis” of BPS
The “basis” in basis point comes from the base move or upward swing from the base rate between two percentages, or the spread between two interest rates. Since the changes in the interest rate caused is very little or narrow in the margin, it is the “basis” from which the rise or jump takes place.
The rise in BPS often shows the trend in the money market in a country or acts as an indicator of how the financial market or banking system is functioning in a country. BPS or BP forms the core of measurement of fluctuations in the interest rates of banking institutions thus becoming one of the basic elements of lending money or taking money on interest.
Importance of BPS in the field of Investments
Investors always keep an eye on the fluctuations or rate changes in BPS. This is due to the reason that it gives an overall picture of the present state of the national economy and that of it in the immediate future.
To exemplify, the MF (Mutual Funds) market greatly depends on BPS and it fluctuations. It is practically the Basis of all exchange-traded funds (ETFs).
We always find that when MFs and other ETFs are compared, basis points are used to clearly understand the difference between the costs of investment funds and projected future gains in money terms.
To explain BPS we can say: 1 BP = (1/100th)*1%= 0.01 %. It is a standard unit used to measure interest rates and other percentages in finance.
The acronym BPS is also used frequently to calculate changes in equity indices, mutual funds, exchange-traded funds and fixed-income security yields. This also forms the standard system in the case of all financial instruments all across the world including India.
FAQ (Frequently Asked Questions)
Question: What do we understand by the term Basis in BPS?
Answer: The term Basis means the move in interest rates between the spread in two interest rates: from the existing or basis to the new BPS rate. To exemplify, 5 BPS implies 0.05%. Thus, if an interest rate rises from the existing BPS of 5.00% to 5.25%, it would mean an upward move of 25 basis points.
Question: Why were the initials BPS used whereas it could be termed as percentage changes?
Answer: The term BPS or BP is more common and in use for a very long time in the banking sector. Besides, this term has become very common in the stock exchanges also.
Question: What is the origin of the term BPS or BP?
Answer: BPS, as a term, has its origin in the “basis” which refers to the difference (or “spread”) between two interest rates. In the stock exchange and money market, the dealers or traders frequently refer to BPS to describe the change in one financial instrument relative to another.
Question: What are the most common financial bond segments in which the term BPS is used?
Answer: BPS or BP forms the core of understanding price fluctuations following a hike in the rate of interest announced by the Central Bank of a nation (Reserve Bank of India, in the case of India).
BPS is mostly used for calculation in the case of such bonds and other financial instruments like Treasury Bonds, Corporate Bonds, Interest rate derivatives, Credit derivatives, Equity securities, such as common stock, Debt securities, such as mortgage loans and Options, futures trading.