If Sunbelt Computers were to take out a short-term loan from Chase 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 would be called a compensating balance, which is a portion of a loan that a borrower is required to keep in a deposit account with the lender. It is a way for the lender to ensure that the borrower maintains a certain level of liquidity and can make payments on the loan.

If Sunbelt Computers Were to Take Out a Short-Term Loan