Can Anyone help me differiciate between Net Interest Margin and Interest spread. It seams to me that both use interest income and interest expense to calculate them.
Spcifically, the curriculum says "
" Net interest margin is a summary measure of the net interest return earned on income-producing assets such as loans and bonds." and " The interest spread is a measure of the bank’s ability to invest in assets yielding more than the cost of its sources of funding."
Total lost with this. Hope to get some expert explanation on this.
Thanks
The NIM is a difference between interest earned and interest paid , both are on actual dollars actually on deposit or lent out. This is like a profit margin for the bank on the total business done .
The Interest spread is a rate difference between average rate paid to depositors and average rate obtained from borrowers. It is an average measure across all deposits and loans .
For example the bank may have different maturities for loan and deposit , so the YTM , coupon etc could be different between loan and deposit . The spread is only an indicative figure to know how profitable the bank may be in the coming years
Thank you very much! it is such a great help.