Multiple Choice QuestionHow do financial institutions generate profits?Multiple choice question.By loaning funds at lower interest rates than they pay on deposited fundsBy loaning funds at higher interest rates than they pay on deposited fundsBy charging the same interest rates to borrowers that they pay to saversBy borrowing funds from businesses to purchase capital
Question
Multiple Choice QuestionHow do financial institutions generate profits?Multiple choice question.By loaning funds at lower interest rates than they pay on deposited fundsBy loaning funds at higher interest rates than they pay on deposited fundsBy charging the same interest rates to borrowers that they pay to saversBy borrowing funds from businesses to purchase capital
Solution
The correct answer is: By loaning funds at higher interest rates than they pay on deposited funds.
Here's why:
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Financial institutions, such as banks, accept deposits from individuals and businesses. These deposits are essentially loans from the depositors to the bank, and the bank pays interest on these deposits as a cost of borrowing the money.
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The bank then loans out this money to other individuals or businesses at a higher interest rate. This is the bank's main source of income.
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The difference between the interest rate the bank pays on deposits and the interest rate it charges on loans is known as the net interest margin. This is how banks make a profit.
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Therefore, for a bank to be profitable, it must loan funds at a higher interest rate than it pays on deposited funds.
Similar Questions
financial institutions attract funds from savers by offering ____________ on savings.Question 36Select one:a.profitsb.interestc.revenuesd.benefits
Multiple Choice QuestionWhich of the following best explains how banks attract loanable funds?Multiple choice question.By deferring household consumptionBy paying interest to saversBy supplying capital to businessesBy charging interest on loaned funds
Multiple Choice QuestionWhich of the following explains the interest rate in terms of the supply of and demand for funds available for lending and borrowing?Multiple choice question.The loanable funds theory of principalThe loanable funds theory of incomeThe loanable funds theory of interestThe supply and demand for money
Multiple Choice QuestionWhich of the following determines whether firms will use borrowed funds for investment projects?Multiple choice question.The firms' operational abilities to produce particular goods or servicesThe demand by customers for a popular good or serviceThe interest rate in relation to the rate of return on the projectManagerial decisions based only upon accounting profits
Multiple Select QuestionSelect all that applyWhich of the following exemplify how the interest rate does not perfectly ration capital to its most productive uses?Multiple select question.Small entrepreneurs who are able to secure venture capital fundingBorrowers that are able to earn a return on investment greater than the cost of the borrowed fundsLarge corporate borrowers that use their size and prestige to negotiate more favorable terms than smaller firmsLarge oligopolistic borrowers that pass interest costs on to consumers because they can change prices by controlling outputNeed help? Review these concept resources.
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