Compensating Balance: A Comment
Compensating balance are deposits the borrowing firm keeps with the lending bank in non-interest bearing accounts on loans.It is well known that, when there is no compensating balance imposed, the effective cost of debt remains the same in the two different payment methods, full amortization method...
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| Format: | Article |
| Language: | English |
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Universiti Utara Malaysia Press
2004
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| Online Access: | https://repo.uum.edu.my/id/eprint/25117/1/IJBF%202%202004%2083%2098.pdf |
| _version_ | 1803628870234013696 |
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| author | Choi, Youngna Yoon, Yeomin |
| author_facet | Choi, Youngna Yoon, Yeomin |
| author_sort | Choi, Youngna |
| collection | UUM |
| description | Compensating balance are deposits the borrowing firm keeps with the lending bank in non-interest bearing accounts on loans.It is well known that, when there is no compensating balance imposed, the effective cost of debt remains the same in the two different payment methods, full amortization method and bullet loan (bond) method.It has been experimentally shown that when a compensating balance is imposed, however, the respective effective costs of debt under the two payment methods become different and that the true cost of a fully-amortized loan is always greater than that of a bullet loan. This paper provides a mathematical proof than this is always true.It concludes that, whenever a bank imposes a compensating balance, the borrowing firm should prefer a bullet loan to a fully-amortized one if it wishes to avoid an ambush posed by such a compensating balance. |
| first_indexed | 2024-07-04T06:28:49Z |
| format | Article |
| id | uum-25117 |
| institution | Universiti Utara Malaysia |
| language | English |
| last_indexed | 2024-07-04T06:28:49Z |
| publishDate | 2004 |
| publisher | Universiti Utara Malaysia Press |
| record_format | dspace |
| spelling | uum-251172018-11-01T01:27:45Z https://repo.uum.edu.my/id/eprint/25117/ Compensating Balance: A Comment Choi, Youngna Yoon, Yeomin HG Finance Compensating balance are deposits the borrowing firm keeps with the lending bank in non-interest bearing accounts on loans.It is well known that, when there is no compensating balance imposed, the effective cost of debt remains the same in the two different payment methods, full amortization method and bullet loan (bond) method.It has been experimentally shown that when a compensating balance is imposed, however, the respective effective costs of debt under the two payment methods become different and that the true cost of a fully-amortized loan is always greater than that of a bullet loan. This paper provides a mathematical proof than this is always true.It concludes that, whenever a bank imposes a compensating balance, the borrowing firm should prefer a bullet loan to a fully-amortized one if it wishes to avoid an ambush posed by such a compensating balance. Universiti Utara Malaysia Press 2004 Article PeerReviewed application/pdf en https://repo.uum.edu.my/id/eprint/25117/1/IJBF%202%202004%2083%2098.pdf Choi, Youngna and Yoon, Yeomin (2004) Compensating Balance: A Comment. International Journal of Banking and Finance (IIJBF), 2. pp. 83-98. ISSN 1675-7227 http://ijbf.uum.edu.my/index.php/previous-issues/133-the-international-journal-of-banking-and-finance-ijbf-vol-2-no-1-june-2004 |
| spellingShingle | HG Finance Choi, Youngna Yoon, Yeomin Compensating Balance: A Comment |
| title | Compensating Balance: A Comment |
| title_full | Compensating Balance: A Comment |
| title_fullStr | Compensating Balance: A Comment |
| title_full_unstemmed | Compensating Balance: A Comment |
| title_short | Compensating Balance: A Comment |
| title_sort | compensating balance a comment |
| topic | HG Finance |
| url | https://repo.uum.edu.my/id/eprint/25117/1/IJBF%202%202004%2083%2098.pdf |
| work_keys_str_mv | AT choiyoungna compensatingbalanceacomment AT yoonyeomin compensatingbalanceacomment |