Net Interest Margin
What it is:
Net interestincome to invested assets.is the ratio of net interest
How it works (Example):
Net interestis also known as "net on interest-earning assets."
The formula for net interestis:
Net Interest= (Interest Received - Interest Paid) / Average Invested Assets
Net interestis always expressed as a percentage. Let's look at an example:
Assume John borrows $1,000,000 and uses it to buy bonds of Company XYZ. The bonds pay 5% interest per year, or $50,000. The interest rate on the loan is 3%, or $30,000 per year. Using the formula above, John's net interest is:
Net Interest= ($50,000 - $30,000) / $1,000,000 = 0.02 or 2%
A positive net interestinvestment strategy pays more interest than it costs. Conversely, if net interest is negative, it means the investment strategy costs more than it makes.means the
Why it Matters:
Banks are keenly interested in their net interest margins because they lend at one rate and pay depositors at another. However, comparisons between net interest margins of different banks are not always useful because the nature of each bank's lending and deposit activities varies.