In the context of secured debt, what is a margin call?

A margin call refers to a demand for additional collateral or repayment from a borrower to a lender when the value of the collateral securing the loan falls below a certain threshold. In the context of secured debt, this situation arises particularly in financial agreements where the collateral is critical to mitigate the lender's risk. If the value of that collateral diminishes – for example, due to a decline in market prices or credit quality – the lender may require the borrower to either provide more collateral or repay a portion of the loan to restore the original loan-to-value ratio.

This mechanism is a safeguard for lenders, ensuring that the collateral backing the loan is sufficient to cover the debt in case of default. It emphasizes the importance of maintaining a healthy level of collateral relative to the secured debt. The other options, while related to financial dynamics, do not accurately describe the nature of a margin call.