Consider a bank that has issued a 1yr deposit paying 6 % pa to finance a 2yr loan earning 7 % pa . What is the basis spread for the first year ? What is the basis spread if rates do not change come the start of year 2 ? What is the 2yr spread if rates paid on deposits in year 2 increased to 8 % pa ?•- 

 

Consider a bank that has issued a 2yr deposit paying 5.5 % pa to finance a 1yr loan earning 7.5 % pa . What is the basis spread for the first year ? What is the spread if rates do not change come the start of year 2 ? What is the 2yr spread if rates earned on the loan in year 2 falls to 3.5 % pa ?

•What type of risk did the bank face ?

•What risk do banks typically face ? What is the impact on NI and NII over two years in each case ?