4 Interest rate spread Suppose that East bank currently cha

4 . Interest rate spread Suppose that East bank currently charges a 3.5% fixed interest rate on a six-year auto loan and pays a 2.0% interest rate to customers who buy 6-month CDs. Suppose that at the end of the six-month period depositors roll over the funds in the CD for another six months. Then the interest rate spread is interest rate on Suppose now that market interest rates increase by 0.2%. This means that East bank has to pay a CDs when they mature, while charginginterest rate on the six -year auto loans What will happen to the interest rate spread? It increases to 2.0% and the East bank\'s interest income falls. O It remains the same and the East bank\'s interest income is unaffected ? It becomes equal to 2.2% and the East bank\'s in erest income rises. It decreases to 1.3% and the Eart bank\'s interest income falls

Solution

Interest Rate Spread will be difference in Interest rate on loans and interest rate on deposits=3.5%-2%=1.5%

If Market rate increasee by 0.2% then Bank has to pay new rate on CDs are 2.2% and they will charge this by increasing lending rate equal to 3.7%

Hence interest rate spread remains unaffected

OPtion B is correct response

If they dont rise the lending rate then spreas will become 3.5%-2.2%=1.3% which means income of banks will fall

then option D is correct response...( Go with this one first because nothing is mentioned about whether banke inreases lending rate)