Question

In: Finance

26. Which of the following motives for holding cash concerns the need to compensate banks for...

26. Which of the following motives for holding cash concerns the need to compensate banks for providing certain services and loans.

a.

transactions motive
b.

compensations motive
c.

speculative motive
d.

precautionary motive

Solutions

Expert Solution

B) Compensations motive

Explanation: It is a motive to hold cash balances is to compensate banks for. providing certain services and loans. Banks provide a variety of services to business firms, such as clearance of cheque, supply of credit information, transfer of funds. and So on. While for some -of these services banks charge a commission or fee, for others they seek indirect compensation. Usually clients are required to maintain a minimum balance of cash at the bank. Since this balance cannot be utilized by the firms for transaction purposes, the banks themselves can use the amount to earn return. Such balances are compensating balances.

jeff jeffy answered 2 years ago
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