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Compensating balance
       
 
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Compensating balance

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Compensating balance
The amount of money a bank requires a customer to maintain in a non-Interest bearing account, in Exchange for which the bank provides otherwise free services.
    
Deposit that a bank can use to Offset an unpaid loan. No Interest is earned on the compensating balance, which is stated as a percentage of the loan. The compensating balance increases the Effective Interest Rate on the loan. The compensating balance is usually 10%. Assume a company borrows $50,000 from the bank at a 10% Interest rate with a 5% compensating balance. The loan is on a Discount Basis meaning Interest is deducted immediately. The compensating balance is calculated at $2500
    
Effective Interest Rate is the true rate of return considering all relevant Financing expenses.
Posted by  PrĂ©vis AG, Information Management Network LLC.
 
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