Net interest rate spread refers to the difference between the interest rate a financial institution pays to depositors and the interest rate it receives from loans. In other words, it is the difference between the borrowing and lending interest rates of the bank.

How do you calculate interest rate spread?

For example, let’s assume XYZ Bank earned a weighted-average interest rate of 5% on its assets and paid a weighted-average interest rate of 3% on its liabilities. XYZ Bank’s net interest rate spread would equal 5% – 3% = 2%.

How banks make money with interest rate spread?

A bank earns money from interest it receives on loans and other assets, and it pays out money to customers who make deposits into interest-bearing accounts. The ratio of money it receives to money it pays out is called the bank spread. The bank spread can indicate a bank’s profit margin.

Spread is basically the price you as a house owner will have to pay on top of the repo rate, to avail of the lending facility a bank has to offer. For example, Bank of Baroda is going to charge 8.35 per cent interest on repo rate-linked home loans. The 295-basis-point* difference could be referred to as the spread.

What is the difference between lending rate and interest rate?

Lending rate or interest rate is the amount charged by lenders for a certain period as a percentage of the amount lent or deposited. Low risk loans are usually charged low interest rates while loans which are considered as high risk are charged higher interest rates.

Do banks prefer high or low interest rate?

We tend to think that banks prefer high interest rates, and certainly their revenues are likely higher when interest rates on loans and other investments are higher. However, banks must fund their investments, and bank funding costs are also generally higher when market rates are high.

The bid and ask price is essentially the best prices that a trader is willing to buy and sell for. The bid price is the highest price a buyer is prepared to pay for a financial instrument​​, while the ask price is the lowest price a seller will accept for the instrument.

What does a higher I-spread mean for bonds?

A higher i-spread means that a bond has a higher credit risk. The zero-volatility spread (Z-spread) is the constant spread that makes the price of a security equal to the present value of its cash flows when added to the yield at each point on the spot rate Treasury curve.

What do you mean by net interest rate spread?

Net Interest Rate Spread. What is the ‘Net Interest Rate Spread’. The net interest rate spread is the difference between the average yield a financial institution receives from loans, along with other interest-accruing activities; and the average rate it pays on deposits and borrowings.

What’s the difference between yield to maturity and spread?

A bond’s yield-to-maturity can be separated into a benchmark and a spread. Benchmark rates are usually yields-to-maturity on government bonds or fixed rates on interest rate swaps.

How is the net interest spread like a profit margin?

In simple terms, the net interest spread is like a profit margin. The greater the spread, the more profitable the financial institution is likely to be; the lower the spread, the less profitable the institution is likely to be.