There return objective is to earn a net +ve interest rate margin or net +ve interest rate spread over the cost of funds?
What is the difference?
interest rate margin = ABSOLUTE
Interest rate spread = RELATIVE measure.
Same difference ultimately.
So i think we should write the relative one
Return objective of a bank is to earn a net positive interest rate spread (not the margin?)
Ok let me do this slowly , so I get it too:
Bank has depositors and it takes in money on deposit to pay them interest . Bank takes this money and loans it , earning a spread between interest rate earned and interest rate credited to depositors.
There are two ways to measure if they are doing a good job in managing this successfully . One is actually a bit backward looking and one considers the future potential to do the same . Guess which one is which : spread or margin?
Ok , I don’t want to wait and post again.
Margin is a term used by any business and is a net-net term . i.e. net money earned versus net money spent. That would take into account income components and capital gain components ( yes bank can sell the loans or buy more loans too , so there can be a capital gain , plus bank earns cash interest and pays cash interest ). Since this is a realized/unrealized bit , it would be an accrual component , not a forward looking estimate.
Spread is just the straight rate difference on the average. If the average rate they offered to depositors was x% and the average rate at which they managed to lend the money is y% , then (y-x)% is the spread . It might be indicative oftheir positioning for the business . It does not account for the volume of business , because the averaging hides that , but at least it is a forward estimate.