Consider a bank that borrows $100 million in deposits at a floating rate of T-Bill plus 2%, and lends at T-Bill plus 4%, earning a spread of 2%, as shown below. Both rates are reset semi-annually. However, the benchmark T-Bill for deposits is the 6-month T-Bill, while that for loans is the 3-month T-Bill, as shown below.

a. Assume the 3-month T-Bill rate was 3.0% and the 6-month T-Bill rate was 3.25% when the loan was disbursed. The spread is ( 1.75% ).

b. If the 6-month T-Bill rate increases to 4.50% while the 3-month T-Bill rate increases to 4.0%, the spread drops from 1.75% to ( 1.5% ).