How to Calculate Basis Points
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
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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.
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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.
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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.
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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.
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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.
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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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