Would it be worth it to incur a compensating balance of $10,000 in order to get a 1-percent-lower interest rate on a 1-year, pure discount loan of $500,000?
A) Yes
B) No
C) Not enough information is given to know

Question

Quizplus · Accepted Answer

A compensating balance of $10,000 means you effectively have less than the $500,000 since that amount must be kept in reserve and not used. The savings from a 1-percent-lower interest rate on $500,000 would be $5,000 ($500,000 * 1% = $5,000), which is less than the $10,000 you have to keep as a compensating balance. Therefore, it would not be worth it.

Would It Be Worth It to Incur a Compensating Balance