A compensating balance arrangement usually results in which of the following for a company?
A) Increase its interest income.
B) Increase the effective interest rate on corporate borrowing.
C) Decrease the effective interest rate on corporate borrowing.
D) Exhibit no change in the effective interest rate on corporate borrowing.

Question

Quizplus · Accepted Answer

A compensating balance arrangement requires a borrower to maintain a minimum balance in their account with the lender, which reduces the amount of available funds for the borrower to use. As a result, the effective interest rate on corporate borrowing increases as the lender earns interest on the minimum balance required, and the borrower pays interest on the full loan amount.

A Compensating Balance Arrangement Usually Results in Which of the Following