SIE practice questionmediumMargin Interest
An investor borrows $50,000 on margin to purchase securities. Which of the following is TRUE about the interest charged?
- ANo interest is charged on margin loans
- BThe broker-dealer charges interest on the debit balance, and the rate is typically based on the broker call rate plus a spread✓ Correct answer
- CThe interest rate is set by FINRA at a fixed annual rate
- DInterest is only charged if the customer fails to meet a margin call
Explanation
Why B — The broker-dealer charges interest on the debit balance, and the rate is typically based on the broker call rate plus a spread
When an investor borrows on margin, the broker-dealer charges interest on the debit balance (the amount borrowed). The interest rate is typically based on the broker call rate (also called the call money rate), which is the rate banks charge broker-dealers for margin loans, plus a spread. The rate varies by firm and loan size. Interest accrues daily and can significantly reduce investment returns, making it important for investors to understand the true cost of margin trading.
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