A compensating balance:
A) is required when a company acquires any bank financing other than a line of credit.
B) is often used by banks as a means of rewarding their best credit customers.
C) decreases the cost of short-term bank financing.
D) only applies to zero-interest rate loans.
E) may be required even if a company never borrows funds.

Question

Quizplus · Accepted Answer

A compensating balance is a minimum balance that must be maintained in a bank account as part of a loan agreement, and it may be required even if a company never borrows funds, as it serves as a form of collateral or assurance for the bank.

A Compensating Balance