Bank Money Market Rate
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A bank money market rate is the interest that financial institutions pay to account holders of money market funds (MMFs). This type of investment account offers the advantages of both a savings and a checking account, though with certain federal limitations and restrictions. Obviously, a savings account earns a certain amount of interest, albeit a very small percentage. But investors accept the small return because the savings account has the advantage of high level of accessibility and liquidity. That's the economic term for how easily an investment product can be turned into cash. (In contrast, a house has very low liquidity because it's time-consuming to sell and then receive its cash value, hence the old saying, "house-rich and cash-poor.") The funds in a checking account may or may not earn interest, depending on the particular banking company, but here again the cash is easily accessible and liquid. The account-holder accesses the cash just by writing a check. A bank money market rate is usually at least slightly higher than that for a savings account, and the MMF account-holder also has check-writing privileges so the cash is readily accessible. However, federal regulations restrict the number of checks per month that can be written on this type of account. If the individual writes more checks than is allowed, the institution will deduct a fee from the account's balance. Therefore, the trade-off for the slightly higher interest on an MMF is slightly less accessibility and liquidity. Additionally, the banking institution may require a minimum deposit to open these types of accounts. For example, a new account-holder may need to deposit $1,000.
Even though the bank money market rate is small, MMFs are attractive to account-holders who want higher interest than what they would get from a typical savings account. The apostle Matthew records a time when Jesus told his followers a story about a servant who buried the coins entrusted in his care because he was afraid of risk. The master was angry, upon his return, to learn what the servant had done. He said, "Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury" (Matthew 25:27). In other words, if the servant had invested the coins instead of burying them, the master would have received interest on the investment. Money market funds are a comparatively safe investment, though the bank money market rate may be less than other safe choices such as certificates of deposit and Treasury bills. However, certificates of deposit and Treasury bills are not as liquid. Though these types of investments also have minimum deposit requirements, the cash is much less accessible. For example, certificates of deposit usually are for certain terms, such as six months, a year, or even longer. Heavy penalties are incurred when the funds are withdrawn before the end of the term. These are safe investments for long term needs, but not when liquidity is important to the investor.
Individual investors are not the only ones to save their cash in MMF accounts. Large nonprofit institutions, such as hospitals and universities, often have cash that needs to be invested. If the funds won't be needed for several years, the financial administrators may choose to invest in certificates of deposit or Treasury bills. But when a short-term investment is required in other words, when the cash will be needed in a few months it may be invested in MMFs. The bank money market rate will probably not be as much as could be earned by investing in a certificate of deposit or Treasury bill, but the cash will be more easily accessible. The financial administrators make the conscious decision to trade a percentage point or two in interest earnings for increased liquidity. Of course, for profit corporations also invest in these types of funds when the cash is being held to achieve short-term goals. Obviously, receiving any amount of interest on cash is better than getting none.
Financial institutions offering MMFs as investment opportunities pool them all together and lend the money at a higher bank money market rate than is being paid to the investors. The difference between what banks receive in interest payments and what is paid out to account-holders is what provides these institutions with the profit to pay for capital and operating expenses, such as bank branches, employee salaries, innovative technology, and security. These profits may also be invested in certain (and hopefully wise) investment opportunities. The deposits in money market accounts, as in savings and checking accounts, are protected by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. This federal protection is another advantage to having short term cash deposited in these types of investments.
Potential investors have the opportunity, courtesy of internet technology, to locate a financial institution that offers a competitive bank money market rate on its MMFs. Innovative software applications allow investors to make secure deposits even with financial institutions far from their own geographical location. Before opening an MMF account, however, prospective investors should request information regarding interest rates, fees, and account requirements. For example, the investor will want to know the minimum required deposit and the fees for exceeding the check-writing restriction. The financial institution may offer a tiered schedule for interest. This means that higher balances in an MMF may earn a higher bank money market rate than lower balances. The investor will also want to know how the interest is calculated and when the amount is added to the account. For example, many institutions deposit the earned interest on an MMF once a month. Investors will not realize the gains from comparatively safe investment vehicles as they may from the riskier stock market, but neither will they experience the losses. Where the money in a stock market portfolio will fluctuate, the money in an MMF will slowly increase as interest is added to the account. The principal, which is the original amount invested, stays safe and secure. When safety, liquidity, and accessibility are important investment concerns, then investors are wise to seek out a competitive money market fund.
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