Compensating balances reduce the amount of cash available to the borrower to meet obligations and they decrease the effective interest rate for the borrower.

Question

Quizplus · Accepted Answer

Compensating balances reduce the amount of cash available to the borrower to meet obligations, but they increase the effective interest rate for the borrower because the borrower has to maintain a minimum balance that does not earn interest, effectively increasing the cost of borrowing.

Compensating Balances Reduce the Amount of Cash Available to the Borrower