A Compensating Balance Requirement Means That a Lending Institution Will

question 17

True/False

A compensating balance requirement means that a lending institution will require a borrowing company to keep a certain percentage of the loaned amount on deposit with that institution.

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Definitions:

Variable Rate

An interest rate that can change, in contrast to a fixed interest rate, and is often associated with loans or savings accounts.

Prime Rate

The interest rate that commercial banks charge their most creditworthy customers, often used as a benchmark in lending rates.

Forward Contract

A bespoke contract between two parties for the future exchange of an asset, set at a price determined today, to occur at a specific later date.

Spot Market Price

The current market price at which a particular asset, such as a commodity, currency, or security, can be bought or sold for immediate delivery.