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Shouldn't it be defined as "1/100 of a percentage point"? If you take "1/100 of a percent" verbatim, it could mean the following :

If 1% increases to 1.01%, that is a 1% increase, which, according to the definition "1/100 of a percent", could mean an increase of 100bp.

Instead, the above case means that an increase of 0.1% points is equal to an increase of 1bp, not 100bps.

Defined "1/100 of a percent", "percent" could mean a ratio increase, instead of a point increase. So the definition itself is ambiguous.

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The way in which basis points are almost invariably used is as a spread relationship (at least in fixed income). That is, it is the difference between two yields.

Yields are quoted as percent. (If you wish, percentage points.) Most spread relationships involve yields that are close to each other, so they are multiplied by 100 - so we get basis point spreads.

A change in yield is the spread between the yield now and where it was previously, so it is once again a difference, and so there is no ambiguity in the meaning. If a yield goes from 1% to 1.01%, it is a $100(1.01 - 1.00) = 1$ basis point rise.

Some people might quote low yields in terms of basis points. E.g., they might say that a bond yielding 0.1% has a “a yield of 10 basis points.” This is an non-standard usage of basis point, since it is referring to an absolute yield.

(The only exception I can think of for the usage convention I outlined is for management fees that are low - e.g., an index fund has “a management fee of 10 basis points.” However, since people think of that as a reduction in the return by 10 basis points, it slips through. Equity investors might use basis points for intraday returns. Since they do not quote spread trades in basis points, they have less reason to distinguish the terms.)

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  • $\begingroup$ It us also used quite often for intraday equity returns and spreads. $\endgroup$
    – mark leeds
    Aug 15, 2020 at 2:35
  • $\begingroup$ Equity investors might be less sensitive to the convention, since they don’t use it for quoting prices. I’ll note this. $\endgroup$ Aug 15, 2020 at 11:21

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