Net interest margin is calculated as:

Net interest margin is calculated as:

• A. Net Income / Assets
• B. Interest Income - Interest Expense
• C. Yield on Assets - Cost of Funds
• D. Yield on Liabilities - Cost of Funds

Answer: (C)

The main idea is the spread between what a bank earns on its assets and what it pays for its funds. Net interest margin represents that margin, so it is described as yield on assets minus cost of funds. This captures how much return is earned beyond the cost of funding, per unit of assets. In practice, NIM is often expressed as net interest income divided by average earning assets, which aligns with the concept of a margin. Net interest income (the dollar amount of interest earned minus interest paid) would not be the margin itself, and return on assets is a whole different measure (net income relative to assets). Focusing on the difference between yields on assets and the cost of funds correctly reflects the margin earned from lending and investing activity.

The main idea is the spread between what a bank earns on its assets and what it pays for its funds. Net interest margin represents that margin, so it is described as yield on assets minus cost of funds. This captures how much return is earned beyond the cost of funding, per unit of assets. In practice, NIM is often expressed as net interest income divided by average earning assets, which aligns with the concept of a margin.

Net interest income (the dollar amount of interest earned minus interest paid) would not be the margin itself, and return on assets is a whole different measure (net income relative to assets). Focusing on the difference between yields on assets and the cost of funds correctly reflects the margin earned from lending and investing activity.