When you borrow money using stocks or bonds as collateral, what are the pay-back rules?
The answer depends on who is lending you the money:
If you use your stocks or bonds as collateral for a bank loan, the bank will define the interest and repayment terms.
Some corporations have set up profit-sharing programs that allow employees to borrow against their stocks. Here again, the employer or plan sponsor sets the terms for repayment.
If you use a margin account at a brokerage firm, the terms are the most flexible. Repayment is totally up to you, as long as your collateral doesn't fall below the minimum margin requirements. You don't even have to pay back the interest annually since you can choose to have it added to the outstanding balance. When you sell your stocks or bonds, the amount you borrowed (plus interest) will be deducted from the proceeds.
Because the market is so high, I would strongly caution anyone against using more than half his or her margin power, especially at this time.
Pub Date: 5/01/96