Give two reasons why interest expense may vary across different banks:

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Expert Solution

Answer of the above question is given below.

The following points highlight the two main causes of difference in interest rate. The causes are:

1. Differences in Risk

2. Period of Loan.

Cause # 1. Differences in Risk:

Gross interest rates differ owing to the differences in risk and inconvenience involved, cost of maintaining accounts of borrowers, toil and trouble associated with the business of lending, etc. The greater the risk and inconvenience, the higher is the rate of interest. A Kabuliwala usually charges high rate of interest compared with banks because the former sanctions loan without asking any security.

Cause # 2. Period of Loan:

Generally, longer the duration of loans the higher will be the interest rate. Loan sanctioned for a long period usually carries high interest rate since money or capital is locked for a long time. A short period loan carries a low interest rate.

jeff jeffy answered 2 years ago

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