Lessons in computing returns – I Percentages

Hi there,

Most of the financial calculations are expressed in percentages. Not only profits, there are many other places where this knowledge can be very useful. Let’s catch up with it:

PERCENTAGE POINTS

A percentage point = 1%

Example

You go to a bank to open a fixed deposit account. The bank says, interest rates have gone up from 8% to 10%. How much is the increase? Is it a 2% rise?

The answer is No. An 8% to 10% rise is 25% rise in interest rates. This is how we calculate it:

  • 10 / 8  = 1.25
  • 1.25 * 100 = 125% or 25 % increase in interest rates.

Another way to ay it correctly is – you can say that the interest rates have increased by ‘2 percentage points’.

In financial markets, Instead of percentage points, the term used is ‘basis points’. 1 basis point is equal to 1 / 100th of a percentage point.

  • 1 basis point = 1/ 100th of a percentage point
  • So, 100 basis points = 1 percentage points.

Next time , when the Reserve bank revises the interest rate by ’25 basis points’ , understand that what the bank means Is that it has revised the interest rates by 0.25%

Here are some questions for you to try out-

  1. A bank is offering a 30% increase in the interest rates on fixed deposit. The old rate is 6%. What is the new rate?
  2. You see an advertisement in paper saying that loan rates have slashed from 12% to 10%. What is the actual drop in loan rates?
  3. The RBI increases rates by 25 basis points. If the old interest rate was 6%, what is the new rate?
  4. A bank cuts interest rates by 125 basis points for the 2rd consecutive month. If the interest is 8 % now, what was the interest 2 months back?
  5. The fixed deposit interest rate has gone up from 8% to 10%. What is the rate of increase in percentage and in percentage points?

Answers:

  • 1. The old rate is 6%. The increase is 30%. So, the increase in rate is 6* 30% = 1.8%. The new rate would be 7.8%
  • 2. The loan rates have been slashed fro 12 % to 10%. The decrease in rate is 2 percentage points or 200 basis points or 16.66%
  • 3. The new interest rate would be 6.25%
  • 4. The present interest rate is 8%. So, last month the interest rate was 9.25% therefore, 2 months back, the interest rate was 10.50%.
  • 5.  Increase in terms of percentage points = 2 and increase in terms of percentage is 25%

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3 Responses to “Lessons in computing returns – I Percentages”

Vaibhav

December 27, 2013 at 4:17 pm

I was not knowing these basics. Super, Thanks

Roshni

December 29, 2013 at 10:03 pm

Basis points now make sense. Liked the quiz very much. Thank you very much.

Pritee

February 23, 2014 at 11:12 am

Hello Victor,
I never knew basics about basis points and percentage points. Thanks for sharing the same in so simple language. Loved your examples as it made me to do some math :)

Your site is really a great one for beginners. I am super glad that I came across it. I have already recommended this site to my brother and couple of my friends.

Once again, thanks for such a nice site.

- Pritee

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