Question 5 of 20 2.5 Points Which of the following statements best describes cha

Question

Question 5 of 20 2.5 Points Which of the following statements best describes characteristics of a compensating balance? 0 A. Compensating balance requirements typically apply to individuals, not to businesses. O B. Compensating balances are totally costless to firms, because firms always have excess funds on hand to meet transactions needs. O C. If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased 0 D. Banks are prohibited from earning interest on the funds they force businesses to keep as compensating balances Beset Selection

Explanation / Answer

Banks set compensating balance as a safety measure. This compensating balance does not carry any interest and decreases the net borrowed funds received. So it has direct nexus with effective interest rate.

Hence, correct option is (C).

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.