A compensating balance arrangement between a firm and its bank:
A)increases the return on the loan to the bank.
B)forces the firm to keep a minimum balance in its checking account.
C)increases the cost of the loan to the firm.
D)All of the above

Question

Quizplus · Accepted Answer

A compensating balance arrangement increases the return on the loan to the bank by ensuring that a portion of the loaned funds remains deposited in the bank, effectively reducing the net amount loaned out. This arrangement forces the firm to maintain a minimum balance in its checking account, which is not available for use, thereby increasing the effective cost of the loan to the firm since it has less usable capital while still paying interest on the full loan amount.

A Compensating Balance Arrangement Between a Firm and Its Bank