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18 July, 10:45

1. Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans. a. What arbitrage opportunity is available? b. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits? c. What would you expect to happen to the interest rates the two banks are offering?

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  1. 18 July, 11:10
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    A. Take a loan from Bank One at 5.5% and save the money in Bank Enn at 6%.

    B. Bank One would experience a surge in the demand for loans, while Bank Enn would receive a

    surge in deposits.

    C. Bank One would increase the interest rate, and/or Bank Enn would decrease its rate.
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