What is Call Money?
Call money, otherwise called "money at call," is a short-term financial loan that is payable right away, and in full, when the lender requests it. Dissimilar to a term loan, which has a set maturity and payment schedule, call money doesn't need to follow a fixed schedule, nor does the lender need to give any advanced notice of repayment.
Grasping Call Money
Call money is a short-term, interest-paying loan from one to 14 days made by a financial institution to another financial institution. Due to the short term nature of the loan, it doesn't feature ordinary principal and interest payments, which longer-term loans may. The interest charged on a call loan between financial institutions is alluded to as the call loan rate.
Brokerages use call money as a short-term source of funding to keep up with margin accounts for the benefit of their customers who wish to leverage their investments. The funds can move rapidly among lenders and brokerage firms. Consequently, it is the second most liquid asset that might show up on a balance sheet, behind cash.
On the off chance that the lending bank calls the funds, the broker can issue a margin call, which will typically bring about the automatic sale of securities in a client's account (to change the securities over completely to cash) to make the repayment to the bank. Margin rates, or the interest charged on the loans used to purchase securities, change in light of the call money rate set by banks.
The call money rate can be found under "Money Rates" in the Wall Street Journal.
Benefits and Disadvantages of Call Money
Call money is an important part of the money markets. It has several special features, as a very short period funds management vehicle, as an effectively reversible transaction, and as a means to deal with the balance sheet.
Dealing in call money allows banks the opportunity to earn interest on surplus funds. On the counterparty side, brokerages comprehend that they are facing extra risk challenges utilizing funds that can be called whenever, so they typically use call money for short-term transactions that will be settled rapidly.
The transaction cost is low, in that it is done bank-to-bank without the utilization of a broker. It assists with smoothing the changes and adds to the maintenance of appropriate liquidity and reserves, as required by banking regulations. It likewise allows the bank to hold a higher save to-store ratio than would somehow be conceivable, allowing for greater productivity and profitability.
Call Money versus Short Notice Money
Call money and short notice money are comparable, as both are short term loans between financial institutions. Call money must be reimbursed quickly when called by the lender. On the other hand, short notice money is repayable as long as 14 days after notice is given by the lender. Short notice money is likewise viewed as an exceptionally liquid asset, trailing cash and call money on the balance sheet.
- Call money is typically utilized by brokerage firms for short-term funding needs.
- Call money is any type of short-term, interest-earning financial loan that the borrower needs to pay back promptly at whatever point the lender requests it.
- Call money allows banks to earn interest, known as the call loan rate, on their surplus funds.