Question

Compensating balances
a. are a particular form of collateral commonly required on commercial loans.
b. allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions.
c. are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank.
d. are all of the above.

Answer 1

Answer:

The correct answer is D

Explanation:

Compensating balance is the balance which is to be minimum amount that is to maintained or kept in the bank account, so that could be used to offset the cost incurred by the bank for setting up the loan.

It is that balance which is not available for the company to use and might be needed to disclose in the notes of the borrower in the financial statements.

So, it is a specific kind of collateral, allow bank to monitor payment practice of firms and require to have a minimum amount that borrower need to keep in the checking account.