A compensating balance arrangement between a firm and its bank:

A) increases the return on the loan to the bank.
B) forces the firm to keep a minimum balance in its checking account.
C) increases the cost of the loan to the firm.
D) All of the above

Compensating Balance

A portion of a loan that banks require borrowers to leave in their checking accounts. Effectively increases the bank’s yield. A minimum balance required to compensate banks for their services.

Checking Account

A bank account that allows depositors to write checks against deposited funds, making it easy to access and manage money for daily transactions.

Loan Cost

The total expense that a borrower incurs to take out a loan, including interest rates, fees, and any other charges.