In: Finance
Which of the following statements involving the promised return on a loan is NOT true?
Credit risk may be the most important factor affecting the return on a loan. | ||
Compensating balances reduce the effective cost of loans for the borrower because the deposit interest rate is typically greater than the loan rate. | ||
Compensating balances represents the portion of the loan that must be kept on deposit at the bank. | ||
Compensating balance requirements provide an additional source of return for the lending institution. | ||
Increased collateral is a method of compensating for lending risk. |
The statement which is NOT TRUE is:
Compensating balances reduce the effective cost of loans for the borrower because the deposit interest rate is typically greater than the loan rate.
This is because typically deposit rates in a bank are lower than lending rates and that's how the bank makes money.