How to Calculate Basis Points

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Basis points are commonly used in the mortgage industry.
Basis points are commonly used in the mortgage industry.

In many businesses, particularly within the mortgage industry, basis points, also referred to as BPS (basis point system), are used as a method to calculate commissions into a dollar amount form. BPS also are used to determine any add-ons or deductions to interest rates in the form of a higher or lower rate. Thus, two separate thought processes are involved: one to calculate a dollar amount and one to determine a change in an interest rate. A basis point is equal to .01, or one one-hundredth of one percent.

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Instructions

    • 1

      Determine the dollar amount the basis points will be based on and the basis points that will be used to determine a dollar amount with regard to a commission.

    • 2

      Multiply the basis points by the dollar amount. Example: (5) BPS based on $100,000. Calculation is .0005 x 100,000 = $50. Example: (35) BPS based on $100,000. Calculation is .0035 x 100,000 = $350.

    • 3

      Determine the starting interest rate and the basis points to be used toward that rate to determine an add-on or deduction against an interest rate using basis points.

    • 4

      Add or subtract the basis points against the interest rate. Example: Starting interest rate is 6 percent and you are adding .40 basis points to that rate. The new rate is 6.40 percent. If you needed to deduct the same .40 BPS from the rate as a discounted rate, the new interest rate would be 5.60 percent.

    • 5

      Use the same calculation to determine a dollar amount even if the BPS is above 100 or a full percentage point. For instance, if the BPS is (145) and the dollar amount is $100,000, your calculation would be 1.45 x 100,000 = $1,450. Regarding an interest rate starting at 6 percent, the new rate would be 7.45 after adding 1.45 to it.

Tips & Warnings

  • The Federal Reserve uses basis points to indicate increases or decreases in the federal funds rate (the rate used to lend money to financial institutions).

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References

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