What is ‘Call Loan Rate’
a short-term interest rate levied by financial institutions on loans granted to broker-dealers It is the interest rate that is imposed on loans given to broker-dealers that are used to make margin loans to their margin account customers, also known as call loan rates. After receiving a request from the lending institution, these loans are due by the broker-dealer on call (that is, on demand or immediately). The call loan rate is used as the foundation for determining the price of margin loans.
Every day, the call loan rate might change in reaction to variables such as market interest rates, the supply and demand of money, and general economic circumstances, among other things. Several daily newspapers, including the Wall Street Journal and Investor’s Business Daily, report the rate on a regular basis (IBD). Also known as a broker’s call.
Explaining ‘Call Loan Rate’
In the financial industry, a call loan is a loan made to a broker-dealer that is used to fund client margin accounts. The interest rate on a call loan is determined on a daily basis; this rate is referred to as the call loan rate, broker’s call, or the call loan rate. A margin account is a form of brokerage account in which the broker loans the customer money in exchange for the money being used to buy securities.
The loan is secured by the securities held in the account, as well as by the cash that the margin account holder is obliged to have paid into the account before it may be released. Using a margin account, investors may take advantage of leverage, which allows them to trade greater positions than they would otherwise be able to take. Even though trading on margin has the ability to amplify earnings, it may also result in the magnifying of losses as well.
Call Loan Rate FAQ
What is the broker's call rate?
The broker's call rate, also known as the call loan rate, is the interest rate levied by banks on loans provided to brokerage companies in the form of commissions. Brokers may issue margin calls on the traders to whom they have loaned cash if they suspect that their loans may be called in the future.
How do you calculate call rate?
The broker will then borrow the necessary funds from a bank in order for the customer to be able to purchase shares immediately. When the bank calls a loan, it charges a call money rate equal to the London Interbank Offered Rate (LIBOR) + 0.1 percent, which is the highest rate available. If the broker decides to collect the money before the 30-day period has expired, he or she will issue a margin call.
Further Reading
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- The call loan market in the US financial system prior to the Federal Reserve System – papers.ssrn.com [PDF]
- Cash setting, the call loan rate, and the liquidity effect in Canada – www.jstor.org [PDF]
- Financial markets and economic growth – onlinelibrary.wiley.com [PDF]
- Financial panics, the seasonality of the nominal interest rate, and the founding of the Fed – www.jstor.org [PDF]
- Daily and intradaily tests of European put-call parity – www.jstor.org [PDF]
- The unholy trinity of financial contagion – www.aeaweb.org [PDF]
- The effect of refinancing costs and market imperfections on the optimal call strategy and the pricing of debt contracts – onlinelibrary.wiley.com [PDF]
- National bank window dressing and the call loan market, 1865–1872 – www.sciencedirect.com [PDF]
- What is international financial contagion? – onlinelibrary.wiley.com [PDF]
- Pricing life‐of‐loan rate caps on default‐free adjustable‐rate mortgages – onlinelibrary.wiley.com [PDF]
