Which option describes a bank’s income from loans?

Which option describes a bank’s income from loans?

• A. Interest received on loans
• B. Service charges on investments
• C. Fees for stock trades
• D. Insurance premiums

Answer: (A)

When a bank makes a loan, income from that loan mainly comes from the interest charged on the outstanding balance. The borrower pays interest over time, and that interest revenue compensates the bank for the risk of lending and for supplying the funds. The amount depends on the loan balance and the interest rate, and it is recorded as interest income on the bank’s financial statements. The principal repayment is just returning the money lent, not a source of income. The other items are different revenue streams. Service charges on investments come from managing or servicing investments, not from lending. Fees for stock trades are brokerage fees for facilitating trades, again unrelated to loan income. Insurance premiums are payments for insurance products, which are a separate line of business for the bank.

When a bank makes a loan, income from that loan mainly comes from the interest charged on the outstanding balance. The borrower pays interest over time, and that interest revenue compensates the bank for the risk of lending and for supplying the funds. The amount depends on the loan balance and the interest rate, and it is recorded as interest income on the bank’s financial statements. The principal repayment is just returning the money lent, not a source of income.

The other items are different revenue streams. Service charges on investments come from managing or servicing investments, not from lending. Fees for stock trades are brokerage fees for facilitating trades, again unrelated to loan income. Insurance premiums are payments for insurance products, which are a separate line of business for the bank.