High Yield Money Market Accounts
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In an investigation of high yield money market accounts, it was uncovered that money market accounts come as close to cash as possible and tend to be safer investment instruments than many other types of investments. These accounts are available through various sources including banks, credit unions, or even investment companies. The good thing is an investment company does not have to be involved. Liquid assets, which include short-term investment instruments like MMA's, are seen as cash in the financial world. In times of economic uncertainty, people prefer to maintain a decent level of liquidity. MMA's are perfect when a person has short term savings goals for an emergency fund set aside, future travel expenses, or an expected dental or medical expense. Money market accounts are relatively easy transactions. Exchanged for cash in a matter of minutes at a local bank, these instruments do not require the assistance of a broker to convert.
Some of these instruments are available at low yield and some at high yield. Traditionally, an investor who is willing to allow the bank to hold on to their funds for an extended period of time can earn a higher yield than the more short-term type. In any case, an MMA is considered a short-term investment; yet the yields are higher than say a savings account because there is a time period or maturity date attached to the account. Because high yield money market accounts are really the same as cash, they can be converted fairly quickly. This does not mean there is no penalty for instant conversion. The goal of MMA's is to provide "near-perfect liquidity. There are four basic account types that accomplish this goal: 1) U.S. Treasury Bills, 2) Bank Certificates of Deposit, 3) Commercial Paper, and 4) Banker's Acceptance. Each has its own rules and regulations. The one thing these instruments have in common is there are very similar to deposit checking and savings accounts in that the principal balance is not diminished like a stock or bond purchase might be. The initial deposit remains and any additional yield will be added at a later date. Although all high yield money market accounts have a similar goal, each takes a different road to get there.
U.S. Treasury Bills (also referred to as T-Bills) are backed by the government. Sold through a competitive bidding process at a discounted rate from the face value (or par value) in denominations of $1,000, a person can purchase a maximum of $5 million worth. An individual who purchases T-Bills is paid the face value at maturity. Usually after one month, three months or six months weeks the instrument can be cashed in for the face value. Because a T-Bill is a government issued instrument, there is little chance that the conversion process would ever have a glitch.
Next, there are Bank Certificates of Deposit. Most people refer to them as CD's. CD's are high yield money market accounts that are in the form of bank issued certificates that entitle a person to receive interest. Basically, its a promissory note that is insured by the FDIC. They are sold in denominations starting as low as $100 for individual purchasers and going beyond denominations of $100,000 for institutional investors. Although they are just as liquid as U. S. Treasury Bills, there is a penalty for converting them to cash before the maturity date. The purchaser of this instrument will be paid the interest along with the initial principal at the end of the term.
There are short-term unsecured debt instruments called Commercial Paper. In essence, they are high yield money market accounts issued by large corporations. They are used for the financing of accounts receivable, inventories and handling short-term liabilities; as an alternative to direct borrowing. A line of credit will often accompany Commercial Paper in case its needed to pay down the paper at maturity. Usually the maturity date is 270 days or less. Like the T-Bill, Commercial Paper is often issued at a discount rate. The prevailing market interest rates are the gauge for the rate. There is usually no collateral backing this note which makes it hard for small businesses and almost impossible for individuals to justify purchasing this type of instrument.
Lastly, there are Bankers' Acceptances. These high yield money market accounts start off as a bank order from a customer. They are short-term credit investments initialed by a non-financial entity, yet guaranteed by a bank for a certain specified amount of money to pay in the future. When the bank approves the order for payment as "accepted," the bank takes responsibility for making the payment to the purchaser. Acceptances are the same as other high yield money market accounts in that they are traded at a discount from face value, yet differ from the other MMA's listed because they are traded on the secondary market.
In general money market accounts are financial instruments that are fairly liquid. When looking for which type of account to invest in, one must keep in mind the following: 1) how much cash you can afford to "set aside" for the purpose of an investment, 2) whether or not the penalty for early conversion is worth the risk, and 3) how quickly the account can be converted to cash. "And so he that had received five talents came and brought other five talents, saying , Lord, thou deliveredst unto me five talents: behold, I have gained beside them five talents more." (Matthew 25:20) Rather than having money just sitting in a regular savings or checking account, it makes sense to have the money work to earn more money. Opening high yield money market accounts is a favorite option for low-risk, fixed income investing. The dividends that are paid from these accounts are safe; making them an easy choice.
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