We, general public use the percentage for denoting the interest. We say that the rate of interest on saving account obtainable in India is 6% or six percent per annum. For us, who deal with relatively small quantum of funds, the percentage measure serves the purpose quite well. However in the bigger financial world of institutional transactions involving millions of dollars, one hundredth of a percentage counts and makes a huge difference. Hence, they introduced a much finer measure called ‘Basis Point’. One hundred basis points make one percentage or one basis point is one hundredth of a percentage or 0.01%.
A two basis point interest on a loan of a billion dollars is $200,000 per annum, quite a significant sum.
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