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Warren Buffett

Investment Dictionary


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Interest Rate Spread

 

Interest rate spread’ is a very important measure for banks and other financial institutions. As money lending is the core business for most of the banks, it is very important that this operational segment would be profitable. And ‘interest rate spread’ shows the potential profitability of lending business. 

 

The essence of lending business is simple: financial institutions borrow money from some clients in a form of deposits or other, and lend that money to the other clients for a higher interest rate. Ant the difference between interest rate of deposits (and other money sources) and between the interest rate loans (or other interest-bearing assets) is the ‘interest spread’.

 

Interest spread formula


Interest rate spread = Average interest rate of interest-bearing assets / Average interest rate of borrowings

 

Another similar ratio is ‘net interest margin’.

 

 






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