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Net Interest Margin Formula | NIM Calculation | Examples - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo friends today we are
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going to learn a new topic a new concept
that is the net interest margin formula
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again this is the part of the ratio
analysis topic so let's understand this
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the net interest margin formula is
basically your interest that you have
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received and the interest that you have
paid divided by the average invested
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assets into your company the average
invested assets that have got
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materialized in the company so this is
basically the net interest margin
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formula but what exactly this is all
about we need to learn that now the NIM
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it's it's sure it's a full form the
net interest margin which is also known
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as your NIM is the ratio every investor
should use every invest time the net
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interest margin ratio talks about the
talks about the NIM meaning how much
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the interest as an investor receives
over how much he or she pays out so this
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is all about is the story for the net
interest margin let's see the formula
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NIM is equal to any interest that you have
received in the due course less any
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interest
that you have paid
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/ this whole thing divided by your
average
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invested assets but this is going to be
your formula now let's understand this
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formula with the help of a hypothetical
example so that we have some idea
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regarding what exactly is going on here
let's take a simple example to
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illustrate net interest margin formula I
said there's a guy called John he has
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been experimenting with different
investment instruments recently he has
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tried a bunch of investments and he
wants to see how he is doing he has a
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borrowed let's say $100,000 from
the bank and he has invested the entire
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amount in some investment instrument now
the bank is charging him 10% as
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the interest rate
and this is basically the simple
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interest on the loan and he has been
getting a 9% quarterly now compounding
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or compounded from the investments this
is a receipt you can say that this is
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what he is receiving this is what he is
paying and this is the amount which he
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has borrowed so find out the NIM over
here at the net interest margin
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first we'll find out how much xavius or
John over here has to pay to the bank
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and then we'll calculate the interest
adds xevious will receive so xevious over
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here or
just change it to Xevious over here
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we'll have to pay an amount equal to $100,000 into 10% which is
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$10,000 to the bank and
xavius will receive at the end of the
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year he will receive at the end of the
year some amount something like this is
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equal to the $100,000 that is the amount
into because it's compounded 1+0.9
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right 0.9 this whole divided by 4 and
raised to 4 because of the compounding
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process as I told you it is a quarterly
compounding that's why it's divided by 4
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and raised to 4 I hope you got it
close the bracket so you have to also
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deduct -1 from here
this amount has to be over here 0.09
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because of 9% and not 90% so what he'll
go what is going to receive the amount
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something like this 1 lakh 9 - 100000 so 9307 is the
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amount which is going to receive
so our NIM is going to be interest
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received - the interest paid so you can
say open the bracket what is the
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interest received - the interest paid
you need to close the bracket divided by
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the total borrowed amount so you can say
the NIM is negative over here which is
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not good right so this is basically the
formula interpretation formula solution
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for NIM now let's understand the
explanation part of the NIM now when an
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investor invests its money in let's say
in bonds or other investment instruments
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your she gets some percentage of interest
on her or his investments at the same
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time if we assume that the money that is
being invested is actually borrowed then
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the investor or the borrower also needs
to pay interest
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to the lender of the money now in this
formula we are trying to find out the
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difference between the interest that has
been received - the and the interest
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that has been paid in in the formula so
and then we would compare the difference
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between the average invested assets to
find out the proportion so the average
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invested assets are the average are the
average of all the investments and we
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take average invested assets to find out
the median of all the invested assets so
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that we can ease out we can ease out
that the difference between difference
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among the various invested assets now
what exactly is the use of the formula
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of the net interest margin formula so
this is the ratio every bank uses every
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bank uses
and it's because the banks are in the
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business of taking deposits from the
investor and then using the same money
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to earn the interest on their
investments second and NIM is one of the
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most common ratio you can say which is
used to compare the performances of the
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banks this is very important for an
individual investor as I'm talking about
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individuals over here
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the net interest margin formula would
also be useful as he or she would be
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able to see how much they earn and how
much they pay basically proportionately
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but that is the difference fourth the
net interest margin formula is basically
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a measure how well the investment
strategy
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how well an investment strategy is is
executed so if the NIM
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over here if it is less if the NIM is
less there is a room for any improvement
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if the NIM is well on target then maybe the investor may
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continue continue with the same sort of
the investments the range and the
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instruments both now this is basically
the calculator that you can use it the
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interest received will will put down or
jot down some numbers over here so as to
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do some permutation and combination and
receive some ants over here let's say
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your interest received is $100,000 and your interest paid is
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$50,000 and your average invested assets
remains the same let's say it's 1
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million so the net interest margin
formula gives us how much 0.5%
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so because of the interest paid
is 50% let's reduce this to
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40000 so your interest margin
formula will increase so what you can
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make out is that if your net interest
I'm just saying I'm just writing paid
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and receive if you're paid decreases
then the ratio basically increases that
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is what we are determining including
keeping the same that the assets under
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management are the same and this is the
same if this is the scenario your ratio
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increases now let's increase the number
to 60,000 so automatically
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this this automatically your net
interest margin formula will reduce so
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if this increases
then keeping this to same this portion
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that is your ratio decreases now in the
similar fashion if you if we put some
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numbers over here in interest received
as let's say 90,000 and keeping this as
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the 50000 amount what do you see that
keeping the interest paid as constant if
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your interest received decreases
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if your interest received decreases this
remains same the assets remain same then
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your ratio decreases and vice versa the
same the paid remains the same if this
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case increases that is a received amount
and the assets remaining the same your
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ratio will increase so this is how it is
you can you can change the numbers here
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and there and you can come out with some
really good conclusions out of the out
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of the formula thank you everyone
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