Bank of Scotland has been borrowing in the U.S. market and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2.5 million CD (certificate of deposit) at 6.5% and is planning to use the amount to fund a one-year loan in British pounds at 8.5% for a 2% expected spread. The spot rate of U.S. dollars for British pounds is $1.28/1.

Question: What interest rate should the bank charge on the loan to maintain the 2% spread, given the new exchange rate of $1.26/1? Show full calculations