A bank borrows funds from its depositors by paying them 2% interest on the funds.It lends those funds to borrowers by charging an interest of 5% on the loans.The bank's spread is
A)2 percent.
B)3 percent.
C)4 percent.
D)5 percent.

Question

Quizplus · Accepted Answer

The bank's spread is the difference between the interest rate it charges borrowers and the interest rate it pays to depositors.

Spread = Lending rate - Borrowing rate

In this case, the lending rate is 5% and the borrowing rate is 2%.

Spread = 5% - 2% = 3%

Therefore, the bank's spread is 3%. So, the best choice is B.

A Bank Borrows Funds from Its Depositors by Paying Them