Final answer:
A compensating balance results in an effectively higher interest rate than the stated rate, as lenders charge more to those they consider higher risk. Interest rates above the market equilibrium can cause a surplus of financial capital as demand decreases. The value of a loan is also affected by the borrower's repayment likelihood and market interest rates.
Step-by-step explanation:
A compensating balance results in the borrower's paying an effectively higher interest rate higher than the stated rate on the debt. When lenders have less confidence in a borrower, they typically charge a higher interest rate, which leads to higher required monthly payments. A compensating balance is an example of how borrowers may end up paying more over time than the nominal rate would suggest.
The concept of the compensating balance can also relate to how the financial market works. A loan at a higher than equilibrium interest rate may discourage borrowing and result in a surplus of supply. Conversely at such rates, lenders might lower the rates to attract more business, moving the rate toward equilibrium level.
Last but not least, loan value fluctuates based on the borrower's likelihood of repayment and the prevailing interest rates. For example, a loan to a frequently late payer becomes less attractive, while a loan originated during periods of lower interest rates might appreciate in value when economic rates increase.