when funds are compared basis points are used to provide a clearer understanding of the difference in their costs for example an analyst may state that a fund with 0 35 in expenses is 10 basis points lower in cost than another with an annual expense of 0 45 since interest rates don t apply to equities basis points are less commonly used as terminology for price quotes in the stock market instead stock prices are quoted in dollars and cents 
basis points and credit spreadscredit spreads are typically expressed in basis points where one basis point is equal to 0 01 for instance if a corporate bond yields 3 and a comparable government bond yields 2 the credit spread is 100 basis points 3 2 1 or 100 basis points the precision of basis points allows for clear communication of even small changes in credit spreads which is crucial for accurate market assessments the credit spread measured in basis points reflects the perceived credit risk of the bond issuer a wider spread indicates higher credit risk and vice versa for example if the credit spread of a company s bond widens from 100 basis points to 150 basis points it suggests that investors perceive an increase in the company s credit risk this change in perception can be due to various factors including the deteriorating financial health of the issuer or unfavorable market conditions changes in credit spreads therefore measured in basis points impact bond prices inversely when credit spreads widen and there s an increase in basis points bond prices generally fall because investors demand higher yields to compensate for the increased risk conversely when credit spreads narrow a decrease in basis points bond prices typically rise as the perceived risk decreases and investors are willing to accept lower yields basis points and risk managementbasis points can also generally be used as part of risk management techniques though some of the following points may seem intuitive after reading the article above it s a worthwhile callout to note that small changes in basis points can tell more information than just a change in percent basis points offer a high level of precision this precision is allows for accurate measurement and communication of even the smallest changes in financial variables for instance when discussing interest rate changes or credit spread variations even the slighted deviation in either direction can give vital information about broader markets like we talked about in the last section about credit spreads a widening of credit spreads indicates increased perceived risk of default therefore it may not even matter the quantity of basis points for risk management the key part is understanding the direction in which basis points are aggregating risk managers use basis points to monitor these spreads and adjust their credit exposure accordingly market risk or the risk of losses due to changes in market conditions can also be assessed using basis points fluctuations in market variables such as equity prices foreign exchange rates and commodity prices can be measured in basis points therefore users of this information can use basis points to evaluate how volatile these items may be and the direction in which they re moving last in stress testing and scenario analysis risk managers use basis points to model the impact of extreme but plausible changes in market conditions for example they might analyze the effect of an interest rate increase of 200 basis points on the portfolio s value they then can refine that model to as fine of a level as they want i e they can adjust to 201 basis points to see how that minute change can impact models 