If a company arranges notional pooling with its bank, what happens to the interest across its accounts?

When a company arranges notional pooling with its bank, it allows for the management of cash across different accounts while maintaining them as separate legal entities. In this arrangement, any credit (interest earned) and debit (interest owed) balances across the various accounts are offset against each other.

This means that instead of earning and paying interest on each account individually, the bank calculates a net position for the group of accounts. If, for instance, one account has a significant credit balance while another has a corresponding debit balance, the interest earned on the credit account can offset the interest due on the debit account. As a result, the company effectively reduces its overall interest expense, making notional pooling a cost-effective treasury management solution.

This explanation reflects the nature of notional pooling, where interest is effectively consolidated without the physical movement of funds. The other choices do not accurately reflect the mechanics of notional pooling in this context, as they describe separate interest calculations, adjustments of interest rates, or consolidation of funds, none of which align with the fundamental principles of this specific banking service.