Question

Suppose Big Bank offers an interest rate of 10.0​% on both savings and​ loans, and Bank Enn offers an interest rate of 10.5​% on both savings and loans. a. What profit 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? a. What profit opportunity is​ available? A. Take a loan from Big Bank at 10.0​% and save the money in Bank Enn at 10.5​%. B. Take a loan from Bank Enn at 10.5​% and save the money in Big Bank at 10.0​%. C. Take a loan from Big Bank at 10.5​% and save the money in Big Bank at 10.0​%. D. Save at both banks.

Answer 1

Option A. Take a loan from Big Bank at 10.0​% and save the money in Bank Enn at 10.5​%.

Step-by-step explanation:

Take a loan from Big Bank and deposit in Bank Enn. This activity can lead to a profit of 0.5% on the amount.

Assuming you take a Loan of $3000 from Big Bank at 10% interest rate. Present cash in hand is $3000 and the interest to be paid will be 10% of $3000 which is $300 every period.

If you deposit this amount with Bank Enn who pays an interest of 10.5%. You will receive $315 (10.5% of $3000) every period.

Doing this, you have a gain of $15 by the gap in the interest rates.