compensaing balance essentaly increases the intenest rate on money borrowed Expl

Question

compensaing balance essentaly increases the intenest rate on money borrowed Explain interest rate is vanable compensating bance is requroa aborrower hasae of the ortre amount borrowed However a compensating balance is required, borrower does not have use of the entire amount borroeed However, ein O A Faise " rate is only cherge on the amount hat is avalale Tue Ia compensating balance required, a borower does not have use of the entire amount borowed balance is requred, aborrower pay" a one-urne surn or up to 10%ofto ban talance.

Explanation / Answer

Answer

C) True, If a compensating Balance is required a borrower does not have use of the entire amount borrowed

Explanation

Since Compensating Balance is the additional amount of borrowing which cannot be used by borrower but the borrower is liable to pay interest on it though it is not available to borrower and therefore it will increase effective interest rate on net borrowed amount.

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