The Toy Store borrowed $12,000 from the bank and agreed to keep $3,000 on deposit at all times. The net result of this compensating balance agreement is that:
A) the Toy Store actually only borrowed $9,000.
B) the Toy Store actually only borrowed $3,000.
C) the actual interest rate is lower than the stated interest rate.
D) none of the above are true.

Question

Quizplus · Accepted Answer

The compensating balance of $3,000 means that the Toy Store effectively has access to only $9,000 of the $12,000 borrowed, as $3,000 must remain on deposit.

The Toy Store Borrowed $12,000 from the Bank and Agreed