A compensating balance is a minimum amount of money that a bank requires a borrower to keep on deposit in order to qualify for a loan. The compensating balance is typically a percentage of the loan amount. For example, if a company borrows $1 million from a bank, the bank may require the company to keep a compensating balance of 10% on deposit, or $100,000. The compensating balance serves as collateral for the loan and protects the bank in case the borrower defaults on the loan.
What is a compensating balance quizlet?
A compensating balance is a balance that a company must maintain in its account with a financial institution in order to receive certain services or privileges from that institution. The compensating balance may be a certain percentage of the company's loan from the institution, or it may be a fixed dollar amount.
What is a compensating balance chegg? A compensating balance is a minimum balance that a bank requires its customers to maintain in their accounts in order to receive certain services. The compensating balance may be a fixed amount, or it may be a percentage of the value of the services received.
The most common services for which a compensating balance is required are loans and lines of credit. For example, a bank may require a business to maintain a compensating balance of 10% in its account in order to receive a loan. This means that the business would need to keep at least 10% of the loan amount in its account at all times.
Compensating balances are also sometimes used to offset the cost of other services, such as check-clearing and wire transfers. In these cases, the compensating balance is typically a fixed amount.
Compensating balances can be a useful tool for banks in managing their risks. By requiring customers to maintain a minimum balance in their accounts, banks can reduce the likelihood of default on loans and other obligations. Additionally, compensating balances can help banks to offset the cost of providing certain services.
However, compensating balances can also be a burden for customers, particularly small businesses. The minimum balance requirements can limit a business's ability to invest its funds in other areas, and the cost of services can be higher than at banks that do not require a compensating balance.
As such, it is important for customers to carefully consider the terms of any account that requires a compensating balance. Customers should make sure that they understand the requirements and the costs involved before entering into an agreement. Which one of the following is not reported as part of cash and cash equivalents on the balance sheet? The answer to this question is "prepaid expenses." Prepaid expenses are not reported as part of cash and cash equivalents on the balance sheet. What is the classification of compensating balance? Compensating balances are balances that banks require their business customers to maintain in their accounts in order to offset the costs of providing services to those customers. The required balances may be a percentage of the customer's credit line, a percentage of the customer's average daily balance, or a fixed dollar amount. Why are compensating balances used? A compensating balance is an amount of money that a company is required to keep on deposit with a financial institution in order to compensate the institution for services rendered. This compensating balance may be a percentage of the company's credit line or loan amount, or it may be a flat fee. The company is usually allowed to earn interest on the compensating balance.
There are several reasons why a financial institution may require a compensating balance. First, it helps to offset the risk that the company will default on its loan or credit line. Second, it ensures that the company has enough money available to cover any fees or interest charges that may be incurred. Finally, it allows the financial institution to offer services to the company at a reduced cost.