What will happen to the interest rate spread

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Problem: Suppose that North 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 9-month CDs. Suppose that at the end of the nine-month period depositors roll over the funds in the CD for another nine 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 (the same, a higher or lower) interest rate on CDs when they mature, while charging (the same, a higher or lower) interest rate on the six -year auto loans.

Required:

What will happen to the interest rate spread?

A. It decreases to 1.1% and the North bank's interest income rises.

B. It decreases to 1.1% and the North bank's interest income falls.

C. It becomes equal to 2.4% and the North bank's interest income rises.

D. It increases to 2.0% and the North bank's interest income falls.

Reference no: EM132417919

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