Which of the following statements involving the promised return on a loan is NOT true?

A. Credit risk may be the most important factor affecting the return on a loan.
B. Compensating balances reduce the effective cost of loans for the borrower because the deposit interest rate is typically greater than the loan rate
C. Compensating balances represents the portion of the loan that must be kept on deposit at the bank.
D. Compensating balance requirements provide an additional source of return for the lending institution.
E. Increased collateral is a method of compensating for lending risk.

Ans: B. Compensating balances reduce the effective cost of loans for the borrower because the deposit interest rate is typically greater than the loan rate