Under a compensating balance agreement:
A) the minimum compensating balance is considered a cash equivalent.
B) the compensating balance is available for day-to-day use.
C) the net result is that the actual interest rate is higher than the stated interest rate.
D) all of the above are true.

Question

Quizplus · Accepted Answer

A compensating balance agreement requires the borrower to maintain a minimum balance in a deposit account with the lender, which cannot be used in day-to-day operations. This minimum balance is considered as an opportunity cost that the borrower must pay to the lender to compensate for the credit extended. Therefore, the actual interest rate charged by the lender is higher than the stated interest rate.

Under a Compensating Balance Agreement