Question

Banks that offer low interest rates to people with good credit

A. maximize profits at little risk.
B. sacrifice profits for less risk.
C. maximize profits at great risk.
D. sacrifice profits for more risk.

Answer 1

Banks offering low interest rates to people with good credit 'sacrifice profits for less risk'. They lend to low-risk borrowers at lower returns to maintain steady repayments and long-term profitability.

Step-by-step explanation:

Banks that offer low interest rates to people with good credit generally fall under option B: sacrifice profits for less risk. This strategy involves lending to individuals with a high creditworthiness, implying a lower probability of default. Because these borrowers are less risky, banks are willing to accept a lower return in the form of lower interest rates.

From a business perspective, banks need to manage their liabilities (like customer deposits) and assets (like loans). The competition for attracting deposits can compel a bank to offer higher interest rates to depositors, potentially causing a mismatch between the rates paid to depositors and those received from borrowers. Banks generally try to balance this by charging an interest rate on loans that covers the cost of paying interest on deposits, ensuring profitability and mitigating risk.

Essentially, by offering lower interest rates to creditworthy individuals, banks strategize to maintain a stable flow of repayments and sustain their profitability over the long term.

Learn more about Bank Interest Rates here:

Answer 2

The answer is: B. sacrifice profits for less risk.

Interest rates influence the amount of money that the borrower had to give back to the bank and Higher interest rate would give higher profit for the bank.

When bank people give low interest rates for people with good credit, the number of revenue that bank would make from giving the loan would decrease. But people with good credit has high likelihood of returning the money they borrow, which mean that there is less risk for the bank.