Call Loan Rate
Wouldn't it be great if you saw a great deal on a stock that was selling low, you could borrow the money, buy the stock and then quickly sell it at a profit to pay back the loan? After all, it does take money to make money. Investors do this all the time by setting up a margin account at a brokerage firm. They can borrow money to buy up to 50% of the value of a stock and pay it back (usually within 30 days).
But where does the brokerage firm get the money to loan out? From a bank of course, with a special call loan rate.
Let's say Johnny Hotshot wants to purchase 5,000 shares of a stock that has hit what he thinks is a temporary low price of $15 per share on his margin account. He promises to pay the money back within 30 days after he has bought and sold the stock, preferably at a profit. The brokerage firm Get Rich Quick does not have that much cash available, so they go hat in hand to a bank who loans them the money at a call loan rate of 4%.
This sounds like a great deal except the call loan rate is recalculated every day and also compounds daily until the loan is repaid or is called in by the bank. Calling in means the bank decided they want their money pronto, so if they do, Get Rich Quick has to pay back the loan immediately. If they do not have the funds, they will need to force Johnny Hotshot to use the cash in his margin account or sell his securities in order to raise enough money to repay the call loan.
Related or Semi-related Video
Finance: What is Forced Conversion?59 Views
Finance allah shmoop what is forced conversion Okay this is
forced conversion Yeah this is also forced conversion and so's
this Yeah that is the issuer of this particular bond
Like the company who borrowed money has the right as
described in the indenture to force you to convert the
bond either into and say twenty five shares of common
stock or something else Which sort of implies that a
stock price the over under price of breaking evens about
forty bucks a share takes you get that thousand dollars
divided by the twenty five shares Think it's you forty
bucks a share or the issuer or company who sold
the bond in the first place can simply call the
bond and force converted into cash for the small conversion
premium of ah two point five percent or that's twenty
five bucks in this thousand dollars par value bond So
in this sense essentially the break even Numbers actually 41
dollars a share not forty there because you get an
extra little premium bump there if they force you to
convert the bond or debt into equity Got it We'll
force conversion in a bond sense is usually something cos
do when they can either refinance the bond at cheaper
interest rates or are doing so well operationally that they
have enough cash Teo just retire their debt They call
it back They buy it back save the interest charges
and quick cash toe work doing something else Either way
it's usually weigh less painful than the other flavour of 00:01:30.926 --> [endTime] forced conversion
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