Question

 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 ?

Suppose now that market interest rates increase by 0.2%. This means that East bank has to pay the same, a lower, OR a higher interest rate on CDs when they mature, while charging  a higher, a lower OR, the same interest 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 rises.

It remains the same and the East bank’s interest income is unaffected.

It increases to 2.0% and the East bank’s interest income falls.

It decreases to 1.3% and the East bank’s interest income falls.

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