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:

Form 1040

The official form provided by the Internal Revenue Service (IRS) which is utilized by individuals to submit their yearly income tax returns.

Tax-Exempt Dividends

Dividends that are paid by investments in municipal bonds or certain mutual funds which are not subject to federal income tax.

Corporate Dividends

Payments made by a corporation to its shareholders, usually derived from the company's profits.

Taxable

Pertaining to income, transactions, or assets that are subject to tax by governmental authorities.