Final answer:
One basis point is actually 0.01%, or 0.0001 in decimal form, and it represents a one hundredth of a percentage point. This unit of measure is essential for accurately describing small percentage changes in finance.
Step-by-step explanation:
The statement 'One basis point = .01' is false. One basis point is actually equal to 0.01%, or 0.0001 in decimal form. Basis points are commonly used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point represents a one hundredth of a percentage point. When dealing with financial percentages, particularly in the contexts of interest rates or investment returns, precision is important because even small changes can be significant when we are dealing with sums of money dollars, euros, pounds, etc.
For example, if an interest rate increased from 2.00% to 2.50%, this change would be 50 basis points. This is a more precise way of expressing percentage changes, as saying the rate increased by 'half a percent' could be misinterpreted as a 50% increase, which would be significantly different.