Which of the Following Statements Is Most Correct

question 35

Multiple Choice

Which of the following statements is most correct?

• A) Compensating balance requirements apply only to businesses, not to individuals.
• B) Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.
• 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.
• D) Banks are prohibited from earning interest on the funds they force businesses to keep as compensating balances.
• E) None of the statements above is correct.

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Definitions:

Straight-Line Method

Method that allocates an equal amount of depreciation over an asset’s period of usefulness.

Semiannual

Pertaining to a period of six months or occurring twice a year.

Bond Interest Expense

The cost incurred by an issuer of bonds for the interest payments made to bondholders during a reporting period.

Carrying Value

The monetary value of an asset as recorded on the balance sheet, taking into account factors like depreciation or amortization.