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Net Interest Margin (NIM) Formula
NIM is the ratio every investor should use. This ratio talks about the NIM, meaning how much interest an investor receives over how much she pays out.
Here’s the net interest margin formula.
Explanation of Net Interest Margin Formula
When an investor invests money in bonds or other investment instruments, she gets a percentage of interest on her investments.
At the same time, if we assume that the money that is being invested is actually borrowed, then the investor (and the borrower) also needs to pay interest to the lender of the money.
In this formula, we are trying to find out the difference between the interest that is received and the interest that is paid. And then we would compare the difference with the average invested assets to find out the proportion.
Average invested assets are the average of all the investments. We take average invested assets to find out the median of all invested assets so that we can ease out the differences among the invested assets.
Use of Net Interest Margin Formula
- This is a ratio every bank uses. It’s because banks are in the business of taking deposits from investors and then using the same money to earn interests on other investments.
- NIM is one of the most common ratio used to compare the performance of the banks.
- For an individual investor, the net interest margin formula would be also useful as she would be able to see how much she earns and how much she pays proportionately.
- Actually, net interest margin formula is a measure of how well investment strategy is executed. If the NIM is less, there is a room for improvement and if the NIM is well on target, then maybe the investor may continue with the same sort of investments (the range and the instruments, both).
Example of Net Interest Margin Formula
Let’s take a simple example to illustrate net interest margin formula.
Xavier has been experimenting with different investment instruments. Recently he has tried a bunch of investments and he wants to see how he is doing. He has borrowed $100,000 from the bank and invested the entire amount in an investment instrument. Bank is charging him 10% simple interest on the loan. And he has been getting 9% quarterly compounded from the investment. Find out the NIM (if any).
In this scenario, we need to find out the interest rate for each side.
First, we will find out how much Xavier has to pay to the bank. And then we will calculate the interest that Xavier will receive.
- Xavier will pay = ($100,000 * 10%) = $10,000 to the bank.
- And Xavier will receive at the end of the year = [$100,000 * (1 + 0.9/4)4 – 1)] = [$100,000 * (2.252 – 1)] = [$100,000 * 1.252] = $125,200 from the investment.
- The interest received from the investment would be = ($125,200 – $100,000) = $25,200.
Using the NIM formula, we get –
- NIM = (Interest Received – Interest Paid) / Average Invested Assets
- Or, NIM = ($25,200 – $10,000) / $100,000 = $15,200 / $100,000 = 15.2%.
Net Interest Margin Calculator
You can use the following Net Interest Margin Ratio Calculator.
|Net Interest Margin Formula =||
Net Interest Margin in Excel (with excel template)
Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Interest Received and Interest Paid.
You can easily calculate the Net Interest Margin ratio in the template provided.
You can download this net interest margin ratio template here – Net Interest Margin Ratio Excel Template
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This has been a guide to Net Interest Margin formula, its uses along with practical examples. Here we also provide you with NIM Calculator with downloadable excel template.
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