11-24 Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution,the actual interest rate on the usable portion of these loans is higher.

Question

Quizplus · Accepted Answer

The statement is true because the compensating balance that must be kept on deposit does not earn interest, so the total amount of the loan (including the balance) must be used when calculating the interest rate. This makes the effective interest rate on the usable portion of the loan higher.

11-24 Because a Compensating Balance Is the Proportion of a Loan