If Sun Microsystems were to take out a short-term loan from Chase Manhattan for $5 million and were required to keep $500,000 of that in its Chase account, this would be called a(n) _____.
A) compensating balance
B) security deposit
C) commercial-paper arrangement
D) reserve requirement
E) insurance policy

Question

Quizplus · Accepted Answer

This is called a compensating balance. It is a requirement by the lender to maintain a certain amount of funds on deposit with them as a condition of the loan. This serves as a guarantee to the lender that the borrower has sufficient funds to repay the loan if necessary.

If Sun Microsystems Were to Take Out a Short-Term Loan