Which of the following is the rate that commercial banks charge on loans to broker-dealers for margin purposes?

Which of the following is the rate that commercial banks charge on loans to broker-dealers for margin purposes?

• A. Prime rate
• B. Discount rate
• C. Federal funds rate
• D. Call rate

Answer: (D)

The call rate is the interest rate that commercial banks charge on loans to broker-dealers for margin purposes. This rate is specifically tied to the short-term borrowing needs of financial institutions, including broker-dealers, as they manage their leverage and capital requirements in margin accounts. Broker-dealers often borrow funds to support their clients’ trading activities and to satisfy margin requirements. The call rate provides an essential benchmark for these transactions, reflecting the cost of obtaining immediate capital. Since these loans are typically secured with the securities that are being purchased on margin, the call rate is an appropriate measure for these financial activities. In contrast, the prime rate is often the interest rate that banks charge their most creditworthy customers, whereas the discount rate is the interest rate charged by central banks on loans to commercial banks. The federal funds rate represents the rate at which banks lend to each other overnight, which is more relevant to interbank transactions than to broker-dealer lending. Understanding these distinctions is crucial in financial markets, as each rate serves a different purpose and audience.

The call rate is the interest rate that commercial banks charge on loans to broker-dealers for margin purposes. This rate is specifically tied to the short-term borrowing needs of financial institutions, including broker-dealers, as they manage their leverage and capital requirements in margin accounts.

Broker-dealers often borrow funds to support their clients’ trading activities and to satisfy margin requirements. The call rate provides an essential benchmark for these transactions, reflecting the cost of obtaining immediate capital. Since these loans are typically secured with the securities that are being purchased on margin, the call rate is an appropriate measure for these financial activities.

In contrast, the prime rate is often the interest rate that banks charge their most creditworthy customers, whereas the discount rate is the interest rate charged by central banks on loans to commercial banks. The federal funds rate represents the rate at which banks lend to each other overnight, which is more relevant to interbank transactions than to broker-dealer lending. Understanding these distinctions is crucial in financial markets, as each rate serves a different purpose and audience.