Which of the following statements concerning compensating balance agreements is not true?
A) They always reduce the amount of cash available to the borrower.
B) They always involve legal restrictions on the cash received.
C) They always increase the effective interest rate to the borrower.
D) They must be disclosed in the financial statements' footnotes.

Question

Quizplus · Accepted Answer

Compensating balance agreements do not always involve legal restrictions on the cash received. They are arrangements where a borrower agrees to maintain a minimum balance in a deposit account with the lender, which effectively reduces the amount of cash available for other uses but doesn't legally restrict the use of the cash received from the loan itself.

Which of the Following Statements Concerning Compensating Balance Agreements Is