Which of the following is true of compensating balances?
A)Compensating balances increase the effective cost of a loan.
B)Compensating balances allow firms to convert their receivables into cash quickly.
C)Only a small percentage of businesses can issue compensating balances.
D)Most compensating balances are unsecured.

Question

Quizplus · Accepted Answer

Compensating balances are funds that a borrower must keep in a bank account as a condition of a loan, effectively reducing the amount of usable funds from the loan and increasing the effective interest rate or cost of the loan. They do not directly relate to converting receivables into cash, are not limited to a small percentage of businesses, and are not about the security of the loan but rather a requirement by the lender.

Which of the Following Is True of Compensating Balances