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The difference between the interest rate a commercial bank receives when it lends money out and the rate of interest it pays on deposits is known as
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Section 3.2. Finance Career Opportunities: Commercial Banks
A commercial bank is the type of bank with which most of us are familiar. A commercial bank takes money deposits from individuals such as us - we are motivated to make such deposits as the bank keeps our money safe. Hence a commercial bank borrows our money. Yet it pays very little interest - either zero interest or close to it. The commercial bank then turns around and lends the money it has borrowed for much higher rates of interest. Hence the commercial bank's the difference between the interest rate it receives when it lends money out and the rate of interest it pays on deposits. This difference is known as the "spread."
For example, consider a commercial bank that has received $100 million of deposits, for which it pays, on average, a 1.00% interest rate per year. The commercial bank lends out the $100 million at an average interest rate of 6% per. The bank generates $5 million of spread, as follows:
Interest paid to borrow: 1% x $100 million: $1 million
Interest received from lending: 6% x $100 million: $6 million
Spread = $6 million - $1 million: $5 million
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