3) Your bank has 50 % of its loans priced off at LIBOR + 0.5%, on average. The majority of the banks liabilities are volatile liabilities.

Required:

i. Assume that LIBOR rises from 6 % to 6.5%. Will management likely increase deposit rates by 0.50 % immediately? Explain why or why not. What will be the impact on the banks spread?

ii. Assume that the prime rate immediately falls from 6 % to 5.5%. Will management likely decrease deposit rates by 0.50 percent immediately? Explain why or why not. What will be the impact on the banks spread?