Net Interest Margin Formula (Table of Contents)
- Net Interest Margin Formula
- Net Interest Margin Calculator
- Net Interest Margin Formula in Excel (With Excel Template)
Net Interest Margin Formula
- Investment Return = Interest received or return on investment
- Interest Paid = Interest paid on the debt
- Average Assets = (Assets at the start of the year + Assets at the end of the year) / 2
Net Interest Margin tells about how profitable or good the firm is at making its decisions for its investments than just keeping up with its debtors, it is a really important metric for checking the financial stability and operational acumen.
Example
In order to have a better understanding of the concept, we will calculate the Net Interest Margin value by using the above-mentioned formula.
Deven Corporation is in Oil trading business and takes a loan for $100,000 for an interest rate of 9% per annum and they earn $125,000 at the end of the year. What is the net Interest Margin?
- Net Interest Received or Return on Investment = 125,000-100,000 = $25,000
- Interest to be paid = 9%
- Average Assets = 100,000
Net Interest Margin Using Formula is calculated as:
- Net Interest Margin = (Net return on investment – Interest paid) / Average Assets
- Net Interest Margin = (25,000 – 9,000) /100,000
- Net Interest Margin = 0.16 or 16 %
Therefore, net interest margin for Deven Corporation is 16 %.
Explanation of Net Interest Margin Formula
Net interest margin formula is one of the cornerstones of assessing the business acumen and financial wellbeing of a financial institution and can be used to assess other companies well.
It is the difference between the interest received to the interest paid to the average assets, so the term Net Interest is appropriate and the term margin is used as it gives us the net amount made/lost over the assets we have.
Net Interest Margin = (Investment Returns – Interest Paid) / Average Assets
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Average assets are always used to calculate the net interest margin because the gives the entire picture of actually on what amount the interest was paid and interest was received than just the value of the assets marked at the beginning of the year. This gives the comprehensive look of all the assets involved in the year, not at one point in time.
Significance and Use of Net Interest Margin Formula
The uses the Net Interest Margin Value are immense and help us to be very informative and have a view ahead
- With Net Interest Margin one can get the basic understanding of how much above and over the company is earning and thus doing well on the money raised through debt by the company.
- Used basically in the finance industry, where the money is sourced from one source retail or other institutions and is for other banking or lending activities, Net interest margin tells how much the company is making over the interest it is paying on all the assets of the company.
- Can be used by an individual to know about how much is the difference in their investments made and debt acquired by them
Net Interest Margin Calculator
You can use the following Net Interest Margin Calculator
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Net Interest Margin Formula in Excel (With Excel Template)
Here we will do the example of the Net Interest Margin formula in Excel. The calculation of Net Interest Margin in excel is very easy and can take many variables which can be very difficult to calculate otherwise without a spreadsheet.
You can easily calculate the Net Interest Margin using Formula in the template provided.
Deven Corporation has taken a loan of $100,000 at the rate of 9 % per annum and makes 4 percent compounded quarterly, find Net Interest Margin.
- Assets involved can be termed with Amount = B5 = 100,000
- Interest to be paid = B6 = 9%
- Interest to be paid in dollars = B5*B6
- Return earned per quarter = B7 = 4%
- Return earned annually = ((1+B7) ^4 -1) = B16= 16.986%
- Return earned annually in dollars = B15*B5
To Calculate Net Interest Margin
We subtract Return earned annually in Dollars with interest to be paid in $ and divide it by the assets or the amount involved here
- NIM = (B19-B11)/B5 = 0.07985856 = 8 %
Now what we see here is that we have to be very specific about function used to calculate Net Interest Margin value denote by NIM
This excel illustration can be used in google sheets as well. We just need to be clear about the functions and the input.
Recommended Articles
This has been a guide to a Net Interest Margin formula. Here we discuss its uses along with practical examples. We also provide you with Net Interest Margin Calculator with downloadable excel template. You may also look at the following articles to learn more –
