A compensating balance:
I.is required when a firm acquires any bank financing other than a line of credit.
II.increases the cost of short-term bank financing.
III.may be required even if a firm never borrows funds.
IV.is often used as a means of paying for banking services received.

Question

Quizplus · Accepted Answer

A compensating balance increases the effective cost of borrowing because it requires the borrower to keep a non-interest-bearing account balance, which effectively reduces the amount of loanable funds. It can be required even if a firm never borrows, as part of a banking relationship. Additionally, it is often used as a means of paying for banking services, making options II, III, and IV correct.

A Compensating Balance: I.is Required When a Firm Acquires Any Bank Financing Other