Call Loan Rate

What Is a Call Loan Rate?

A call loan rate is the short-term interest rate charged by banks on loans extended to broker-dealers. A call loan is a loan made by a bank to a broker-dealer to cover a loan the broker-dealer conceded to a client for a margin account.

Understanding a Call Loan Rate

Numerous clients trade on margin accounts; an account where a broker-dealer loans a client cash that is utilized to purchase securities. A call loan is made by a bank to a broker with the goal that the broker can cover the loan it makes to its client. A call loan is payable by the broker-dealer on stand by (i.e., on-demand or right away) after getting such a request from the lending institution.

The call loan rate forms the basis whereupon margin loans are priced. As brokers look to create a gain on the loans they make, the margin loan is typically priced as the call loan rate plus a premium. A call loan rate is likewise called a broker's call.

The call loan rate is calculated daily and can vacillate in response to factors, for example, market interest rates, funds' supply and demand, and economic conditions. The rate is distributed in daily distributions, including the Wall Street Journal and Investor's Business Daily (IBD).

How a Margin Account Works

A margin account is a type of brokerage account in which the broker loans the client cash that is utilized to purchase securities. The loan is collateralized by the securities held in the account and with cash that the margin account holder is required to have deposited.

A margin account enables investors to utilize leverage. Investors are able to borrow up to half of the price to purchase a security and hence trade bigger positions than they would somehow have the option to. While this can possibly amplify profits, trading on margin can likewise bring about amplified losses.

Clients must be approved for margin accounts and are required to put aside a base initial installment, known as the minimum margin, in the account. When the account is approved and funded, investors can borrow up to half of the purchase price of the transaction. On the off chance that the account value falls below a stated least (known as the maintenance margin), the broker will require the account holder to deposit more funds or liquidate position(s) to pay down the loan.

In prior emergencies, extreme measures of leverage have caused steep losses once markets start falling. While having a ratio of 2:1 margin can be viewed as conservative, this isn't anything compared to reports of firms being leveraged 30:1. Margin is great for retail investors when markets are rising with low volatility, and destructive when volatility rises and markets head south. The losses get enhanced and the main option by then is to sell to cover the margin requirements.

Illustration of a Call Loan Rate

Bill is hoping to purchase 1,000 shares of company XYZ for $50,000. He doesn't have the cash close by to do as such, so he opens a margin account with Broker ABC to borrow the funds. Per regulations, he deposits $25,000 and borrows the excess $25,000 from the broker. He is charged 4% to borrow the funds.

To make this loan to Bill, Broker ABC borrows $25,000 from Bank DEF and is charged a call loan rate of 2%. The extra 2% that Broker ABC charges Bill is the margin loan rate and the profit Broker ABC makes on its loan. In the event that in three days Bank DEF concludes it needs the $25,000 loan back with interest, Broker ABC should make the payment as it is a call loan.

Features

• The call loan rate changes daily, is distributed in various periodicals, and is payable by the broker-dealer ready to come in case of an emergency, importance on-demand or promptly after getting a request from the lending institution.
• A call loan rate is the short-term interest rate that banks charge broker-dealers on loans.
• Call loans are made for broker-dealers to cover the loans they make to their clients for margin accounts.
• Brokers try to profit on the margin loans they make to their clients, in that capacity, margin loan rates are typically priced at the call rate plus a premium.