A compensating balance: I. is required when a firm acquires bank financing other than a line of credit.
II) increases the cost of short-term bank financing.
III) represents an opportunity cost to the lending institution.
IV) is often used as a means of paying for banking services received.
A) I and III only
B) II and IV only
C) II and III only
D) I and IV only
E) I, II and IV only

Question

Quizplus · Accepted Answer

A compensating balance increases the cost of short-term bank financing as it requires the borrower to maintain a minimum balance, effectively reducing the usable loan amount. It is also often used as a means of paying for banking services received, as the bank can use the balance to offset service fees.

A Compensating Balance: I