Question

Q. Regarding the functions of the banking system in India, which of the following statements best describes the term ‘Spread’?

• A.
  It is the difference between bank rate by RBI and the lending rate by commercial banks.
• B.
  It is the term used for measuring the high-risk lending activities of the bank.
• C.
  It is the difference between the market price of a bond and the coupon rate provided.
• D.
  It is the difference between interest paid to depositors and interest charged from borrowers by banks.

Answer 1

The correct option is D

It is the difference between interest paid to depositors and interest charged from borrowers by banks.

Explanation:

Commercial banks accept public deposits and carry on lending activities based on these deposits for those who want to borrow. There is always a difference between the interest rate charged by banks from borrowers and interest rate paid to the depositors, former is higher than the later. This difference between these two types of interest rates, called the ‘spread’ is the profit appropriated by the bank