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compensating balance

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Compensating balance
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compensating balance

 
Use compensating balance in a Sentence
–noun
1. Also, compensated balance, compensation balance. a balance wheel in a timepiece, designed to compensate for variations in tension in the hair spring caused by changes in temperature.
2. Banking. a deposit balance that is required to be left on deposit by a company to maintain or guarantee credit.
Origin:
1795–1805
Dictionary.com Unabridged
Based on the Random House Dictionary, © Random House, Inc. 2009.
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Compensating balance
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Financial Dictionary

compensating balance

The funds that a corporate borrower is required to keep on deposit in a financial institution in order to satisfy the terms of a loan agreement. The deposit may be in a checking account, savings account, or certificate of deposit, depending on the nature of the agreement. The net effect of a compensating balance requirement is an increase in the effective cost of the loan because the borrower is unable to use all the funds on which interest is paid.

Wall Street Words: An A to Z Guide to Investment Terms by David L. Scott.
Copyright © 2003. Published by Houghton Mifflin.
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