Asked by Jamesetta Quiteh on May 30, 2024
Verified
For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the ________.
A) insurance premium
B) interest rate spread
C) risk premium
D) term premium
Interest Rate Spread
The difference between the interest rates of two different financial instruments, often highlighting the comparative risk or return.
Insurance Premium
The amount that individuals or organizations must pay for their insurance policies, covering a wide range of risks.
Risk Premium
The additional return expected by an investor for holding a risky asset rather than a risk-free asset, compensating for the extra risk.
- Recognize methods to alleviate interest rate risk for banking institutions.
Verified Answer
KU
Kevin UlmerJun 01, 2024
Final Answer :
B
Explanation :
The difference between the interest rate charged on loans and the interest rate paid on liabilities (deposits) is known as the interest rate spread. It represents the earnings of the bank and reflects the risk and costs associated with the lending and borrowing activities. Option A is incorrect as insurance premium is a fee paid by the bank to transfer the risk of lending to an insurer. Option C is incorrect as risk premium is the compensation for bearing risk above the risk-free rate. Option D is incorrect as term premium is the additional compensation paid for holding a longer-term bond.
Learning Objectives
- Recognize methods to alleviate interest rate risk for banking institutions.