Broker Loan Rate
What it is:
How it works/Example:
Let's assume that Broker XYZ is a brokerage firm that wants to purchase several thousand shares of Company ABC for a large client who wants to purchase the shares on margin. The shares cost $2.5 million, and the client agrees to pay Broker XYZ for the shares in 28 days.
Because Broker XYZ trusts the client will pay the money back as planned, Broker XYZ borrows $2.5 million in call money from BigBank so that Broker XYZ and its client can purchase the shares now. BigBank does not establish a payment schedule for Broker XYZ because the transaction is expected to be completed relatively quickly. However, BigBank reserves the right to call the loan (i.e., require Broker XYZ to repay the $2.5 million immediately) at any time.
BigBank sets the broker loan rate at LIBOR + 0.15%. If the bank chooses to call the loan before the 28 days is up, Broker XYZ can issue a margin call to its client, thereby requiring the client to pay $2.5 million immediately.