Question

Some banks require business borrowers to maintain a compensating balance in the bank on short-term loans; for example, if the bank requires a 20 percent compensating balance and you borrow $50,000, at least ___ of the loan amount must be kept on deposit at the bank.

Answer 1

In the context of short-term loans, a compensating balance refers to the requirement by some banks for borrowers to maintain a certain percentage of the loan amount on deposit at the bank. This is done to ensure that the bank has some collateral or security against the loan in case the borrower is unable to repay.

Step-by-step explanation:

In the context of short-term loans, a compensating balance is a requirement by some banks for borrowers to maintain a certain percentage of the loan amount on deposit at the bank.

For example, if a bank requires a 20 percent compensating balance and a business borrower wants to borrow $50,000, at least $10,000 (20% of $50,000) must be kept on deposit at the bank.

This is done to ensure that the bank has some collateral or security against the loan in case the borrower is unable to repay.