1. Suppose Bank One offers a risk-free interest rate of 8.5 % on both savings and loans and Bank Enn offers a risk-free interest rate of 9.0 % on both savings and loans.
a. What arbitrage opportunity is available?
b. Which bank would experience a surge in demand for loans? Which bank would receive a surge in deposits?
c. What would you expect to happen to the interest rates the two banks are offering?
a. What arbitrage opportunity is available ? (Select the best choice below.)
A. Take a loan from Bank One at 8.5 % and save the money in Bank Enn at 9.0 %
B. Take a loan from Bank Enn at 9.0 % and save the money in Bank One at 8.5 %
C. Take a loan from Bank One at 9.0 % and save the money in Bank One at 8.5 %.
D. Save at both banks.
2. Which bank would experience a surge in demand for loans? Which bank would receive a surge in deposits ? (Select the best choice below.)
A. Bank One would experience a surge in the demand for loans, while Bank Enn would receive a surge in deposits.
B. Bank One would experience a surge in the demand for deposits, as will Bank Enn.
C. Bank One would experience a surge in deposits, while Bank Enn would receive a surge in loans.
D. Bank One would experience a surge in the demand for loans, as will Bank Enn.