What Is the Money Market Yield?

The money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year, such as 澳洲幸运5开奖号码历史查询:negotiable certificates of deposit, U.S. Treasury bills, and municipal notes. Money market yield is calculated by taking the holding period yield and multiplying it by a 360-day bank year divided by days to maturity. It can also be calculated using a 澳洲幸运5开奖号码历史查询:bank discount yield.

The money market yield is closely related to the CD-equivalent yield and the 澳洲幸运5开奖号码历史查询:bond equivalent yield (BEY).

Understanding the Money Market Yield

The 澳洲幸运5开奖号码历史查询:money market is the part of the broader finaꦜncial markets that deals with highly liquid and short-term financial securities. The market links borrowers and lenders who are looking to transact in s𓃲hort-term instruments overnight or for some days, weeks, or months, but always less than a year.

Active participants in this market include banks, 澳洲幸运5开奖号码历史查询:money market funds, brokers, and dealers. Examples of money market securities include 澳洲幸运5开奖号码历史查询:Certificates of Deposit (CD), 澳洲幸运5开奖号码历史查询:Treasury bills (T-bills), commercial paper, municipal notes, short-term asset-backed securities, Eurodollar deposits, and 澳洲幸运5开奖号码历史查询:repurchase agreements.

To earn a money market yield, it is thus necessary to have a 澳洲幸运5开奖号码历史查询:money market account. Banks, for example, offer money market accounts because they need to borrow funds on a short-term basis to meet 澳洲幸运5开奖号码历史查询:reserve requirements and to participate in interbank lending.

Money market investors receive compensation for lending funds to entities that need to fulfill their short-term debt obligations. This compensation is typically in⭕ the form of variable interest rates determined by the current interest rate in the economy.

Since money market securities are considered to have low 澳洲幸运5开奖号码历史查询:default risk, the money market yield will be 澳洲幸运5开奖号码历史查询:lower🗹 than the yield on stocks and bond෴s 🌱but higher than the interest rates on standard savi♒ngs accounts.

Calculating the Money Market Yield

Although interest rates are quoted annually, the quoted interest may actually be compounded semi-annually, quarterly, monthly, or even daily. The money market yield is calculated using the 澳洲幸运5开奖号码历史查询:bond equivalent yield (BEY) based on a 360-day year, which helps an investor compare the return of a bond that pays a coupon on an 🔜annual basis with a bond that pays semi-annual, quarterly, or any other coupons.

The formula for the money market yield is:

Money market yield = 澳洲幸运5开奖号码历史查询:Holding period yield x (360/Time to maturity)

Money market yield = [(Face value – Purchase price)/Purchase price] x (360/Time to maturity)

For example, a T-bill with a $100,000 澳洲幸运5开奖号码历史查询:face value is issued for $98,00💃0 and is due to matureꩵ in 180 days. The money market yield is:

• = ($100,000 - $98,000)/$98,000 x (360/180)
• = 0.0204 x 2
• = 0.0408, or 4.08%

The money market yield differs slightly from the 澳洲幸运5开奖号码历史查询:bank discount yield, which is computed on the face value, not the purchase price; however, the money market yie💦ld can also be calculated using the bank discount yield as seen in this formula:

Money market yield = Bank discount yield x (Face value/Purchase price)

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)

The Bottom Line

Investing in money market instruments can be a good way to utilize short-🍷term funds to generate interest income, which is a better use than leaving your cash in a non-interest-bearing or low-interest-bearing vehicle.