A bank's spread equals

Question

Quizplus · Accepted Answer

The bank's spread is usually defined as the difference between the average interest rate earned on its assets (such as loans and securities) and the average interest rate paid on its liabilities (such as deposits and borrowings). This spread represents the gross profit margin of the bank, before deducting other expenses such as operating costs, provisions for bad debts, and taxes. Option A is incorrect because the spread does not necessarily measure the profit per dollar of assets, but rather the difference between the yield on assets and the cost of funding those assets. Option B is incorrect because return on equity is a measure of profitability relative to shareholder equity, whereas the spread measures profitability on the overall balance sheet. Option C is incorrect because the inflation rate is not directly relevant to the spread calculation, unless the bank is using inflation-linked instruments such as inflation-indexed bonds or loans.

A Bank's Spread Equals