4 . Interest rate spread

Suppose that North bank currently charges a 3.5% fixed interest rate on a 15-year mortgage and pays a 2.5% 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 0.2%. 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 increases to 2.5% and the North bank's interest income falls.

It increases to 2.5% and the North bank's interest income rises.

It decreases to 0.8% and the North bank's interest income falls.

It decreases to 0.8% and the North bank's interest income rises.