What Is the Money Market Yield?
Key takeaways
– Money market yield (MMY) annualizes the holding‑period return of short‑term, highly liquid instruments (T‑bills, CDs, commercial paper) using a 360‑day “bank” year.
– MMY uses the purchase price as the denominator (unlike the bank discount yield, which uses face value), so it gives a better investor‑centric measure of return.
– MMY is useful for comparing short‑term instruments with different maturities and pricing conventions; it is close to—but not identical with—the bond equivalent yield (BEY).
– Typical money market yields vary with market conditions and product type; many money market accounts/funds historically yield from near 0% up to a few percent.
– Practical steps: compare MMY across instruments, confirm account type (deposit account vs. fund), check fees/minimums/tax status, and use for liquidity/emergency reserves rather than long‑term growth.
How the money market yield works
– The money market consists of short-term (maturity < 1 year), liquid debt instruments issued by governments, banks, and corporations. Examples: Treasury bills (T‑bills), negotiable CDs, commercial paper, and municipal notes.
– Dealers and investors quote yields in ways that facilitate comparisons among instruments with different pricing and day‑count conventions. MMY is one such convention: it annualizes actual holding‑period return (gain relative to purchase price) using a 360‑day year.
– MMY differs from the bank discount yield (BDY). BDY expresses the discount relative to face (par) value and also uses a 360‑day convention; because BDY uses face value in the denominator it understates the investor’s actual yield compared with MMY.
– MMY is conceptually similar to a bond‑equivalent yield (BEY), but MMY uses 360 days while BEY typically annualizes on a 365‑day basis (or expresses semiannual compounding equivalence).
Calculating money market yield: formulas and examples
Primary formula (most common):
MMY = ((Face value − Purchase price) / Purchase price) × (360 / Days to maturity)
Example 1 — T‑bill:
– Face value (F) = $100,000
– Purchase price (P) = $98,000
– Days to maturity (t) = 180
Step 1: Holding‑period yield = (F − P) / P = (100,000 − 98,000) / 98,000 = 2,000 / 98,000 = 0.02040816
Step 2: Annualize on 360‑day basis: MMY = 0.02040816 × (360 / 180) = 0.02040816 × 2 = 0.0408163 = 4.0816%
Relationship to bank discount yield (BDY)
– Bank discount yield (BDY) = ((F − P) / F) × (360 / t)
– Conversion from BDY to MMY:
MMY = BDY / [1 − BDY × (t / 360)]
Example using prior numbers:
– BDY = (2,000 / 100,000) × (360 / 180) = 0.02 × 2 = 0.04 (4%)
– MMY = 0.04 / [1 − 0.04 × (180 / 360)] = 0.04 / (1 − 0.02) = 0.04 / 0.98 = 0.0408163 = 4.0816%
Relationship to bond‑equivalent yield (BEY)
– BEY = ((F − P) / P) × (365 / t)
– Because BEY uses 365 days whereas MMY uses 360, the numeric values are very close but not identical. You can map between them with a day‑count scaling factor if needed.
What is a typical money market yield?
– Typical yields vary widely by product, issuer credit quality, and macro interest rates.
– In low‑rate environments, many money market deposit accounts and funds have yielded near 0% to a few tenths of a percent; in higher rate environments yields can be several percent.
– Institutional and negotiable instruments (large CDs, commercial paper) typically offer higher yields than retail money market deposit accounts; minimum balances, fees, and access restrictions factor into effective return.
– Historical range (general guidance, not a forecast): roughly 0.01% to 4% in recent years, but actual yields depend on prevailing short‑term policy rates and product features—check current quotes.
What is the 7‑day yield on the money market?
– The 7‑day yield is an annualized estimate of recent weekly income for money market funds or similar instruments and is a commonly quoted performance metric for retail money market funds.
– Typical calculation (simple annualization): 7‑day yield = (income earned over the past 7 days / NAV at start of period) × (365 / 7)
– Fund companies may report a “7‑day SEC yield” or “7‑day net yield” as an easy, comparable short‑term indicator; read the fund’s disclosures for exact methodology.
– Caveat: the 7‑day yield is backward‑looking and can change rapidly with short‑term market rates; it’s not a guaranteed future return.
What are the disadvantages of a money market account or fund?
– Lower returns vs. longer‑term investments: money market instruments generally yield less than stocks or longer‑term bonds.
– Transaction limits and liquidity features: retail money market deposit accounts historically followed Regulation D limits on transfers (six withdrawals per month) though enforcement changed; institutions may still impose limits or fees.
– Fee and minimum balance considerations: some accounts carry monthly fees or require high minimum balances to earn published yields.
– Inflation risk: real return can be negative if yield < inflation.
– Credit risk (for non‑Treasury instruments and money market funds): although many money market instruments are low risk, funds holding private paper carry some credit risk (money market deposit accounts are FDIC‑insured up to limits; money market mutual funds are not FDIC insured).
– Yield variability: yields are variable and can change quickly with market conditions.
– Tax considerations: taxable vs. tax‑exempt instruments (municipal money market funds) affect after‑tax yield.
Practical steps for investors (checklist)
1. Identify your objective:
– Liquidity/emergency fund, short‑term parking of cash, or temporary allocation pending reinvestment?
2. Decide account type:
– Money market deposit account (MMDAs) — FDIC insured up to limits; offered by banks.
– Money market mutual fund (MMMF) — not FDIC insured; may offer higher yields and different tax profiles (taxable vs. municipal).
3. Compare yields using the same convention:
– If comparing advertised returns, be careful about day‑count conventions (360 vs. 365) and whether yields are net of fees.
– For quoted short‑term instruments, compute MMY using the formula above to compare apples‑to‑apples.
4. Check total costs and minimums:
– Look at fees, minimum balances, checkwriting/transfer limits, and whether the yield requires a high balance.
5. Confirm safety and credit quality:
– For deposit accounts: FDIC insurance limits and coverage.
– For funds: portfolio holdings, credit quality, and whether the fund holds government or private paper.
6. Consider tax status:
– Municipal money market funds can provide federally tax‑exempt income (check state tax implications).
7. Use for appropriate role:
– Use money market instruments for capital preservation and immediate liquidity, not long‑term growth.
8. Monitor and ladder:
– If you need slightly longer short‑term horizons, consider short CD ladders or staggered maturities to capture higher yields while retaining regular liquidity.
9. Recalculate returns:
– Use MMY or comparable yield metrics (7‑day yield for funds) and compute after‑fee and after‑tax yields if necessary.
10. Read disclosures:
– Fund prospectuses and bank terms will explain how yields are calculated, fee schedules, and liquidity rules.
The bottom line
Money market yield (MMY) is a standardized way to annualize the actual holding‑period return on short‑term, liquid debt instruments using a 360‑day convention and the purchase price as the base. It helps investors compare yields across short‑term instruments and with longer‑term bonds (via BEY) but is only one piece of the decision. Choose the right vehicle (deposit account vs. fund), check insurance and credit quality, and weigh yield against liquidity needs and inflation. For short‑term cash management and emergency funds, money market instruments are appropriate; for higher long‑term returns, consider longer‑term or higher‑risk allocations.
Sources and further reading
– Investopedia — Money Market Yield (source provided): https://www.investopedia.com/terms/m/money-market-yield.asp
– U.S. Securities and Exchange Commission — Money Market Funds: https://www.sec.gov/fast-answers/answersmoneymkthtm.html
– FDIC — Money Market Deposit Accounts: https://www.fdic.gov/resources/deposit-insurance/faq/money-market-deposit-accounts/
If you’d like, I can:
– Calculate MMY, BDY, and BEY for a custom example you provide, or
– Compare current retail money market account offers and money market fund 7‑day yields (would need the tickers or quotes).