Question : The difference between the lending rate and borrowing rate of commercial banks is known as:
Option 1: Profit
Option 2: Spread
Option 3: Interest
Option 4: None of the above
Correct Answer: Spread
Solution : The correct answer is (b) Spread
The difference between the lending rate and borrowing rate of commercial banks is commonly known as the spread. It represents the profit margin that banks earn from their lending and borrowing activities.
Commercial banks typically borrow funds from depositors or other financial institutions at a certain interest rate, known as the borrowing rate or cost of funds. They then lend out these funds to borrowers at a higher interest rate, known as the lending rate or loan rate. The difference between these two rates is the spread.The spread serves as a source of income for banks. It covers various costs and risks associated with lending, such as operational expenses, credit risk, liquidity risk, and profit margin. A wider spread indicates higher profitability for the bank, while a narrower spread may imply lower profitability.
Related Questions
Trending Articles/News
