The money market yield refers to the interest rate gained from investing in easily tradable securities that mature in less than a year. These securities include negotiable certificates of deposit, U.S. Treasury bills, and municipal notes. To calculate the money market yield, you multiply the holding period yield by a 360-day bank year and divide it by the number of days until maturity. Alternatively, you can also use the bank discount yield to calculate it.
It is strongly connected to the CD-equivalent yield and the bond equivalent yield (BEY).
Learn more about it
The money market is a section of the financial markets that focuses on easily tradable and short-term financial securities. It connects borrowers and lenders who want to engage in short-term transactions, ranging from overnight to a few days, weeks, or months, but always less than a year.
Banks, money market funds, brokers, and dealers are all actively involved in this market. Money market securities, such as Certificates of Deposit (CD), Treasury bills (T-bills), commercial paper, municipal notes, short-term asset-backed securities, Eurodollar deposits, and repurchase agreements, are commonly traded in this market.
In order to receive a money market yield (MMY), you must have a money market account. Banks provide money market accounts to borrow money for short periods and to take part in interbank lending.
Money market investors are paid for lending money to organizations that need to pay off their short-term debts. They usually receive variable interest rates based on the current interest rate in the economy.
Money market securities are known for having a low risk of default. As a result, the yield on these securities will be lower than the yield on stocks and bonds, but higher than the interest rates offered by regular savings accounts.
Calculating the Money Market Yield
Interest rates are quoted annually, but the interest may be compounded at different intervals like semi-annually, quarterly, monthly, or daily. It is calculated using the bond equivalent yield (BEY) based on a 360-day year, making it easier for investors to compare the returns of bonds with different coupon payment frequencies.
The money market yield (MMY) formula is as follows:
MMY = Holding period yield x (360/Time to maturity)
MMY = [(Face value – Purchase price)/Purchase price] x (360/Time to maturity)
The money market yield is slightly different from the bank discount yield. The bank discount yield is calculated based on the face value, not the purchase price. However, the money market yield can also be calculated using the bank discount yield with this formula:
MMY = Bank discount yield x (Face value/Purchase price)
MMY = 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)
Cons
A money market account has a few drawbacks. It may offer a lower return compared to other investment accounts, have restrictions on the number of transactions allowed within a specific timeframe, and require a minimum account balance.
Conclusion
Putting your money into money market instruments can help you earn interest on your short-term funds, which is more beneficial than keeping your cash in an account with little to no interest.