Question

1. First National Bank is somehow able to borrow money at an interest rate of 4% while lending at a rate of 8%.  Therefore, the bank can be said to be engaging in interest rate:
   1. Manipulation
   2. Arbitrage
   3. Speculation
   4. Fraud

Answer 1

Option B.

• If a bank borrows money at lower interest rate and lends it at a much higher interest rate, then the bank can be said to be engaging in interest rate arbitrage.
• Interest rate arbitrage is a method used by most of the financial institutions wherein they take advantage of the difference in the interest rates at two different places and purchase money at a lower interest rate and lend it at a higher interest rate.
• This is usually done to earn higher profits from the difference in interest rates.
• Hence if a national bank borrows money at 4% interest rate and is able to lend at 8% interest rate, then it is said to be engaged in interest rate arbitrage.