1

What does it mean to borrow long and lend short?

I took a mortgage from a bank and I opened a savings account with the same bank on which I get interest. Did I borrow long and lend short? Or did the bank borrow long and lend short?

Improve this question
1
  • Do you have any examples of these terms being used in context?
    – dg99
    Jan 28, 2015 at 23:12

1 Answer 1

Reset to default
2

You borrowed long and lent short, which is why you are paying more in interest than you are gaining. You borrowed on a long term debt (the house) and lent for a short time (the bank account). With a typical yield curve, interest rates increase as you move further out in time. Banks make money by being on the other side of this set of trades (lend long, borrow short, pocketing the difference in the interest rates).

Your example, however, is overly simplified as it leaves out the fact that the savings account can have its rate change, that there are differences in credit quality, etc.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .