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What will happen to the interest rate spread

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Reference no: EM131785195

Suppose that North bank currently charges a 3.5% fixed interest rate on a 15-year mortgage 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 0.4%. This means that North bank has to pay a interest rate on CDs when they mature, while charging interest rate on the 15-year mortgages.

What will happen to the interest rate spread?

  • It decreases to 1.1% and the North bank's interest income falls.
  • It becomes equal to 2.4% and the North bank's interest income rises.
  • It decreases to 1.1% and the North bank's interest income rises.
  • It increases to 2.0% and the North bank's interest income falls.

Reference no: EM131785195

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