Percentage Point

What is Percentage Point and how is it used to find the difference in values?

The term ‘Percentage Point’ refers to a measurement unit that is used to highlight the change in the absolute value of a percentage. For example, if the current value is 6%, then an increase of 1 Percentage Point will indicate that the value has moved up from 6% to 7%. It is also known as Percent Point, or PP in short.

The PP change does not mean that the value has increased/decreased by this percentage. Instead, it indicates a shift in the base of the value. For example, if the present interest rate is 10%, then a decrease of 2 PP will mean that the new interest rate is 8% (instead of a decrease of: 2% of 10% = 0.02%).

This is a generic concept that can be applied on any values that are measured in percentage terms. It also helps in avoiding confusion, when talking about a change/movement in the percentages.

Percentage Point vs percentage change

There is a difference between the calculation of a ‘Percentage change’ in a value, and how ‘Percentage Point change’ is measured. When calculated in percentage terms, the change is determined in relation to the original value. Whereas the Percentage Point change will indicate a shift in the base of the value.

Example: Suppose that a bank charges an interest rate of 8% for a loan of 1 year tenure. If the bank notifies that the interest rate has been decreased by 5%, then it means that the interest rate has reduced from 8% to 7.6% (5% decrease from 8). But if the bank mentions that the interest rate has gone down by 5 Percentage Points, then it means that the interest rate on the loan has decreased from 8% to 3%.

So, it can be observed that there will be a big difference in the values, if the communication is not clear. Using the term ‘Percentage Point’ in the above example will indicate that the change in value is in terms of the absolute change, and it is not an actual percentage increase/decrease.

Percentage Point vs Basis Point

When the difference between two percentages is small, then the concept of Basis Points (BPS) can also be utilized. But the main difference between Percentage Point and Basis Point is the actual value of these two units.

1 Percentage Point indicates a value of 1% (or 0.01). Whereas 1 Basis Point refers to a value of 0.01% (or 0.0001). So, this means that the value of 1 Percentage Point is equal to 100 BPS. Both of these measurement units are used to indicate the shift in the base of the percentage value.

Example: Suppose that there are 2 Mutual Funds, where one has generated an XIRR of 12% and the other has given an XIRR of 13.60%. This means that the second fund has produced 1.6 Percent Point (or 160 Basis Points) higher return, compared to the first fund.

Usage of Percentage Points

The concept of Percentage Point is primarily used to communicate a change in the different types of rates, that are measured in percentage terms. For example, it could be used for indicating the change in interest rates, fees and commissions, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), lending and borrowing rates etc.

In addition, the Percentage Point could also be used to measure the absolute difference between 2 values that are measured in percentage. For example, it could be used to compare the investment returns generated by different investment options; like the Coupon Rate of 2 different bonds.

Example of Percentage Point

Let us use a practical example to explain how the change in rates is communicated and how comparison is done between 2 percentages. Suppose that there are 2 Mutual Funds, where one has a Total Expense Ratio (TER) of 0.8%, and the other has a TER of 1.9%.

A comparison between the 2 expense ratios can be done, by simply taking a difference between the 2 values. This would indicate that there is a difference of 1.1 Percentage Points in the TER of Fund 1 and TER of Fund 2.

The similar idea can also be used to measure a change in the TER values. For example, let us assume that the TER of Fund 2 is reduced by 0.75 Percentage Point. This would mean that the TER has decreased from 1.9% to 1.15%.

Measure Percentage Point difference

The value of Percentage Point is usually quoted in numeric form, but the value will remain the same in percentage form as well. So, if there is an increase of 2 Percentage Points, then it means that we are referring to an increase of 2% in the absolute value (for example, 10.50% to 12.50%).

In addition, it could also be used to indicate smaller changes in the value. For example, a change of 0.2 Percentage Point will mean that the value has changed by 0.2% (or 0.002); 0.05 PP will mean 0.05%, and so on. But usually, the concept of Basis Points and Pips are used to measure the minor changes in value.

PP - Percentage Point definition

In the above image, an example has been given to explain how the difference in value is measured and indicated. To better explain how this translates into actual differences, let us assume that the 8.75% and 9.95% in the above image refer to a commission that has to be paid on the transaction amount.

Suppose that an individual does a transaction of INR 10,000. Now, the difference between the 2 commission amounts can simply be measured as follows:

\(0.012×INR 10,000=INR 120\)

This means that the individual would need to pay INR 120 higher, when there is a 1.2 PP increase in the commission rate, and when the transaction amount is INR 10,000. This can also be confirmed by measuring the commissions at the 2 rates: INR 875 and INR 995 respectively. It is possible to do similar calculations in different situations.

Disclaimer

  • This page is for education purpose only
  • Some information could be outdated / inaccurate
  • Investors should always consult with certified advisors and experts before taking final decision
  • Some images and screenshots on this page might not be owned by FinLib
Scroll to Top