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.