What Is the Money Market Yield?
Let me explain what the money market yield is. It's a measure of the return you get from investing in highly liquid securities and short-term options like U.S. Treasury bills, CDs, and municipal notes. You calculate it by taking the holding period yield and adjusting it for a 360-day bank year. This yield connects closely to CD-equivalent and bond equivalent yields, giving you insights into how short-term financial securities perform.
Key Takeaways
- The money market yield represents the interest rate you earn from liquid, short-term securities.
- You compute it by multiplying the holding period yield by the ratio of a 360-day year to the days until maturity.
- These instruments yield less than stocks and bonds due to low default risk, but they beat standard savings accounts.
- You can access these yields via Treasury bills, commercial paper, and money market mutual funds.
- Grasping this yield helps you make the most of your short-term funds.
How the Money Market Yield Works
The money market forms part of the larger financial markets, focusing on highly liquid, short-term securities. It connects borrowers and lenders for transactions that last overnight or up to a year. Participants include banks, money market funds, brokers, and dealers. Securities in this space cover CDs, Treasury bills, commercial paper, municipal notes, short-term asset-backed securities, Eurodollar deposits, and repurchase agreements.
To earn this yield, you need a money market account. Banks offer them to borrow short-term funds for reserve requirements and interbank lending. As an investor, you lend to these entities and get compensated with variable interest rates based on current economic rates. These securities carry low default risk, so they yield less than stocks or bonds but more than regular savings accounts.
Calculating Money Market Yield: Formulas and Examples
Interest rates get quoted annually but can compound at different intervals. The money market yield relies on the bond equivalent yield and a 360-day year, allowing you to compare bonds with various coupon frequencies.
Here's the formula: Money market yield = Holding period yield x (360 / Time to maturity). Or more detailed: Money market yield = [(Face value – Purchase price) / Purchase price] x (360 / Time to maturity).
Take this example: A T-bill with a $100,000 face value sells for $98,000 and matures in 180 days. The calculation is: ($100,000 - $98,000) / $98,000 x (360 / 180) = 0.0204 x 2 = 0.0408, or 4.08%.
It differs from the bank discount yield, which uses face value instead of purchase price. You can convert it: Money market yield = Bank discount yield x (Face value / Purchase price), or Money market yield = Bank discount yield / [1 – (Face value – Purchase price / Face value)], where bank discount yield = (Face value – Purchase price) / Face value x (360 / Time to maturity).
Frequently Asked Questions
What is a typical money market yield? It usually ranges from 0.01% to 4%, depending on your deposit amount—higher deposits often qualify for better rates.
What is the 7-day yield on the money market? This estimates annual returns by taking the price difference over seven days and multiplying by an annualization factor.
What are the disadvantages of a money market account? You might get lower yields than other investments, face transaction limits, and need to maintain minimum balances.
The Bottom Line
Investing in money market instruments lets you use short-term funds strategically, earning interest while keeping liquidity. Options like Treasury bills and commercial paper come with lower default risk than other securities. Yields typically fall between 0.01% and 4%, influenced by deposit size or account type. If you're looking to boost returns on liquid assets, these provide a low-risk alternative to standard savings accounts.
Other articles for you
A life settlement allows you to sell your existing life insurance policy to a third party for a cash payment exceeding the surrender value but below the death benefit.
Smart contracts are self-executing programs on blockchain that automate transactions without intermediaries.
The Japan Credit Rating Agency (JCR) is Japan's leading credit rating firm providing ratings, research, and services for domestic and international issuers.
Fraud is intentional deceit for gain, often in finance, leading to severe legal and economic impacts.
Accrue refers to the accumulation of financial items like interest, income, or expenses over time, central to accrual accounting.
Working capital loans provide short-term funding for businesses to cover daily operations and manage seasonal fluctuations without investing in long-term assets.
UDAAP refers to illegal unfair, deceptive, or abusive acts or practices in financial services, regulated by the CFPB and FTC to protect consumers.
A growth company generates earnings and cash flows faster than the economy, reinvesting profits for expansion rather than paying dividends.
Depositary receipts are certificates that allow investors to hold shares in foreign companies conveniently through local exchanges.
A tax deed transfers property ownership to a government entity due to unpaid taxes, allowing it to be sold at auction to recover the debt.