Understanding Money Market Rates

Understanding Money Market Rates

Understanding Money Market Rates

When you are looking for a way to save and grow your money, you will likely consider savings accounts, certificates of deposit and money markets. Unlike CDs and savings accounts, money markets offer two different optionsmoney market accounts and money market funds. Each offers different money market rates. Depending on which you choose, they might even have a variance between annual percentage yields and rates. While this might sound overwhelming at first glance, it is actually pretty easy to understand the difference between each money market type and rate structure.

Money Market Account Rates

A money market account is a deposit account much like a savings account. Money market accounts differ from savings accounts in that they usually have a higher interest rate. This is because of what the bank is able to do with funds deposited into money market accounts. Instead of the funds being used to support bank lending (which is what happens to savings deposits), funds within money market accounts are invested in short-term debt securities like treasury bills.

These types of investments have a bit of a higher risk and a higher return, allowing financial institutions to give you a higher interest rate for them. The interest rate in a money market account is variable and is set by the financial institution. It is also FDIC insured up to current limits, and may require a higher initial deposit than a traditional savings account.

Money Market Fund Rates

A money market fund is different than a money market account, because it is a tradable instrument and functions just like a mutual fund. When you buy shares of a money market fund, you have an interest in its underlying securitieswhich are similar to those investments that your financial institution invests your money market account funds in.

Like money market accounts, money market funds have a variable interest rate that is determined by the rates in the underlying debt instruments which you own an interest in. When you look at money market funds, you will not see a standard money market rate as you would in a money market account. This is because you are buying an interest in the fund rather than depositing money for guaranteed growth. Money market funds are not FDIC insured and may not be available for purchase in all banks.

Money Market Rate Breakdown: APR versus APY

When you decide to open a money market account and start comparing money market rates, you may notice that the interest rates quoted by financial institutions (which will appear as APY: annual percentage yield) differ from another rate they give, which is the APR (annual percentage rate). APY (usually the higher number) takes into consideration the effect of compounding interestwhich is the interest you earn on your interest.

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