A compensating balance on a bank loan effectively ____________ the cost of the loan.

Question

Quizplus · Accepted Answer

A compensating balance is a minimum balance that a borrower must maintain in a bank account with the lender as a condition of the loan. Since the borrower cannot use this portion of the funds held in the account as they are required to maintain it, the effective cost of the loan increases. Therefore, a compensating balance raises the cost of the loan.

A Compensating Balance on a Bank Loan Effectively ____________ the Cost