________ is a cheap source of funds for the lender and represent opportunity costs for borrowing firms.
A) compensating balances
B) transaction facilitation
C) investment opportunities
D) cash account

Question

Quizplus · Accepted Answer

Compensating balances are funds that a borrower must keep in a bank account as a condition for getting a loan. These funds are a cheap source of liquidity for the bank (the lender) because the bank can use these funds for other purposes, such as granting loans to other customers. For the borrowing firm, these funds represent an opportunity cost because the money could have been used for other investments or purposes but instead is tied up as a non-interest-bearing or low-interest-bearing account.

________ Is a Cheap Source of Funds for the Lender