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

Required:

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

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