Call Money Rate
What Is the Call Money Rate?
The call money rate is the interest rate on a type of short-term loan that banks provide for brokers, who thusly loan the money to investors to fund margin accounts. For the two brokers and investors, this type of loan doesn't have a set repayment schedule and must be reimbursed on demand. The investor who claims the margin account pays their broker the call money rate plus a service fee in return for utilizing the margin capacities offered by the broker.
How the Call Money Rate Works
The call money rate, likewise called the broker loan rate, is utilized to figure the borrowing rate an investor will pay while trading on margin in their brokerage account. Trading on margin is a risky strategy wherein investors make trades with borrowed money. Trading with borrowed money increases the investor's leverage, which thus intensifies the risk level of the investment.
Special Considerations
The advantage of margin trading is that investment gains are amplified; the disadvantage is that losses are likewise enhanced. While investors trading on margin experience a decline in equity past a certain level relative to the amount they have borrowed, the brokerage will issue a margin call that expects them to deposit more cash in their account or to sell an adequate number of securities to make up the shortfall.
This can increase losses to the investor since margin calls in all probability happen when the securities in the account have fundamentally diminished in value — selling securities when they have lost value powers the investor to lock in losses rather than continuing to hold the investment and sit tight for when the value has recuperated to sell.
Illustration of the Call Money Rate
The current call money rate is 3.5% as of June 2022. That is the highest rate it's been in a year, rising after the Federal Reserve lifted U.S. interest rates on June fifteenth — by 75 basis points to a scope of 1.5% to 1.75% — to combat inflation. Broker ABC is hoping to purchase 1,000 shares of Apple Inc. for a large client that is hoping to buy the shares on margin. The client will pay the broker in full in 30 days or less.
The broker will then, at that point, borrow the required money from a bank so the client can buy shares now. The bank can call the loan whenever and charges a call money rate of the London InterBank Offered Rate (LIBOR) plus 0.1%. In the event that the broker decides to collect the money before the 30 days is up they'll do a margin call. Or on the other hand assuming the value of the securities fall below the maintenance margin requirement they'll call the loan.
Features
- Margin trading permits gains to be amplified through leverage, however it additionally amplifies losses.
- The call money rate, otherwise called the broker loan rate, typically isn't accessible to people, all things being equal, investors pay the call money rate plus a service fee on a margin account.
- The call money rate is the benchmark interest rate that banks charge brokers who are borrowing the money to fund margin loans.
- Margin calls happen when the securities in the account have altogether diminished in value.
