# What does basis point mean?

S&P's schedule of costs mention that getting a rating from them currently costs "6.25 basis points" of the offering.

Does this literally mean 6.25%? As in if the bond produced was 100 million in size, the issuing company (or whoever was paying for the rating) would have to pay 6.25 million?

• "Basis point: one hundredth of one percent", so 6.25 basis points on 100 million would be \$62,500. – ChrisInEdmonton Apr 16 '16 at 17:41
• "I was considering issuing a bunch of debt backed by nothing so therefore it is related to personal finance." Huh???? – Nate Eldredge Apr 16 '16 at 17:49
• Nate - I'm just guessing that was a bit of a joke. Aside from that "what is a basis point" is a valid question if we haven't answered it yet. – JTP - Apologise to Monica Apr 16 '16 at 19:18
• @JoeTaxpayer. If that the reason to keep it (and I agree that's a valid question), it might be a good idea to change the title line...? – keshlam Apr 16 '16 at 21:13
• @keshlam - good idea, sir. Done. – JTP - Apologise to Monica Apr 16 '16 at 21:56

According to the Investopedia:

One basis point is equal to 1/100th of 1%, or 0.01% (0.0001)

Thus, if S&P charges 6.25 basis points to rate a bond and the bond is \$100 million, this will cost you \$62,500.

(I'm not sure you can actually issue a bond as a not-super-wealthy individual, but I suppose there's nothing stopping you from trying)

FYI, the term exists to solve the following language problem when discussing percentages:

Alice: I got a loan at 5% APR. But if I ever miss a payment the rate goes up 2%.

Bob: That's it? 5.1% doesn't seem all that bad.

Alice: No, it goes up to 7%.

Bob: Oh, you mean it goes up 40%.

Alice: ACK!

Because `percent` can be a unit just like `meter` or `orange`, a term is needed to distinguish when you're talking about the unit called `percent` vs. the mathematical operation called percent, especially when you need to use them in the same sentence. So `basis point` means 1/100 of the unit called `percent` (the same way `centimeter` means 1/100 of the unit called `meter`). Alice and Bob can then avoid confusion by using only one meaning of the word "percent" at a time:

Alice: I got a loan at 5% APR. But if I ever miss a payment the rate goes up by 200 basis points.

Bob: Yikes, to 7%!

Alice: Yep.

or:

Alice: I got a loan at 500 basis points APR. But if I ever miss a payment the rate goes up by 40%.

Bob: Yikes, to 700 basis points!

Alice: Yep.

• thanks! this helps with the terminology I hear colloquially – CQM Apr 19 '16 at 22:04