Net Interest Margin

Net interest margin can be defined as the ratio that is calculated between net interest income and invested assets.

Example of Net Interest Margin

Net interest margin can be also defined as a net yield on interest earning assets.

Formula of Net Interest Margin

The formula of net interest margin can be shown as under:-

Net Interest Margin = (Interest Received – Interest Paid) / Average Invested Assets

The net interest margin is represented in the form of percentage always.

In order to understand the concept of net interest margin assume that an individual ABC borrows $1, 000,000 and use this amount to purchase some bonds from the company XYZ. The interest by the company on the bonds is 5 percent of the total amount that means $50,000 per year. The interest rate on the loan that ABC has taken from the company XYZ is 3 percent of the total amount for a year. The net interest margin can be calculated by using the formula mentioned above:-

Net Interest Margin = ($50,000 – $30,000) / 1,000,000 = 0.02 or 2 percent

A positive net interest margin means the investment strategy pays more interest than it costs. Conversely, if net interest margin is negative, it means the investment strategy costs more than it makes

Importance of Net Interest Margin

The concept or the idea of Net Interest Margin is most important for banks as they grant loans at one end and pay deposits on the other hand. However it is not wise for individuals to compare the net interest margins offered by different banks as different banks may have different lending or depositing policies.

Other Related Accounting Articles:

• Compounding
• Floating Interest
• Fixed Rate Bond
• Earning Assets
• Annuity Ladder
• Net Investment
• Balloon Interest
• Leverage Buyout
• Load Fund
• Calculation of Stockholder Equity