Figure 6.9: The Flow of Grain with Bank Intermediation and Profit
Figure 6.9 illustrates the flow of grain in the second period in a scenario where a bank intermediates a loan. In this example, the bank lends at a 10% interest rate and pays 6% on deposits. Julia's harvest of 90 units is used to repay her 55-unit loan (principal plus interest), Marco withdraws his 53-unit deposit (principal plus interest), and the bank earns a 2-unit profit from the interest rate spread.
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Figure 6.9: The Flow of Grain with Bank Intermediation and Profit
Calculating a Bank's Profit from Lending
A commercial bank makes a loan of $500,000 at an annual interest rate of 8%. To fund this loan, the bank holds a deposit of the same amount, paying an annual interest rate of 3%. What is the bank's profit from the difference in interest rates on this loan and deposit over one year?
A financial institution lends out $200,000 at an annual interest rate of 7.5% and holds a corresponding deposit of $200,000 for which it pays an annual interest rate of 4%. A statement claims the institution's annual profit from this spread is $8,000. This statement is correct.
Bank Profit Calculation from Interest Rate Spread
A credit union issues a one-year loan for $80,000 at an annual interest rate of 7%. To finance this, it uses an $80,000 deposit that pays a 2% annual interest rate. Based on the difference between the interest earned and the interest paid, the credit union's profit for the year is $____.
A bank's profit is often calculated by multiplying the difference between the interest rate on loans and the rate on deposits (the interest rate spread) by the total loan amount. Match each lending scenario with the correct annual profit generated.
A bank's profit is calculated by multiplying its total lending amount by the difference between the interest rate it charges on loans and the rate it pays on deposits. A bank currently has a portfolio of $100 million in loans, charges an average interest rate of 7% on these loans, and pays an average interest rate of 2% on the deposits that fund them. Which of the following independent changes would result in the largest increase to the bank's annual profit?
Analyzing Changes in Bank Profitability
Evaluating Loan Portfolio Profitability
Evaluating Bank Lending Strategies
Example of Bank-Intermediated Transactions and Profit