A Compensating Balance

question 62

Multiple Choice

A compensating balance:

• A) is required when a company acquires any bank financing other than a line of credit.
• B) is often used by banks as a means of rewarding their best credit customers.
• C) decreases the cost of short-term bank financing.
• D) only applies to zero-interest rate loans.
• E) may be required even if a company never borrows funds.

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Definitions:

Capital Lease

A lease classified as a financial transaction where the lessee gains substantial control over an asset, treated like an asset purchase.

Bond Indenture

A legal document specifying the terms and conditions under which a bond is issued, including the interest rate, maturity date, and other covenants.

Stated Interest Rate

The annual interest rate declared on a financial instrument, such as a loan or bond, not taking into account compounding or fees.

Market Interest Rate

The prevailing rate of interest available in the market, influencing the rates charged on loans and paid on deposits.