Understanding what money market yields are and how they work can help investors choose assets to meet their financial needs.
Definition and Example of Money Market Yield
A money market yield represents the amount of profit or interest that will be generated from an investment in short-term debt over a specific period of time. The terms for money market securities like Treasury notes and CDs are for less than a year. ”A money market yield is the estimated total of what you’ll receive by investing in extremely liquid assets,” Cliff Auerswald, president of All Reverse Mortgage, told The Balance in an email. Investing in the right assets to meet your financial goals requires careful consideration of interest yield, Auerswald said. Investors looking for the best investment strategies to achieve their financial goals compare money market yields to find the best returns if they invest in these short-term assets. Money market yields are generally based on the investment’s purchase price. The money market yield is typically expressed as a percentage rate and is separate from the starting principal. It is commonly known as the interest payment an investor would receive for financial assets, like the interest on a bond.
How Does a Money Market Yield Work?
When you invest in securities, you expect a return on investment or an ROI. In the case of money market yields, the assets are highly liquid, short-term assets. ”The money generated from investing in money market accounts, CDs with short maturity dates, and Treasury notes are all counted as money market yields,” Jim Pendergast, senior vice president of altLINE told The Balance in an email. Money market securities are those that have quick returns, such as Treasury bills, short-term, asset-backed securities, corporate and bank debt securities, and municipal notes, among others. Given the low default risk, yields on money market assets are generally lower than on stocks and bonds, but higher than the interest from savings accounts.
Money Market Yield vs. Annual Percentage Rate
A money market yield is a measure of how much profit is generated from an investment over a specific time. However, it’s important to note that this is different from the annual percentage rate (APR), which is the cost of borrowing money. For example, you’d pay an APR on your credit card balances that you carry over from month to month. The money market is a convenient place to deposit your funds when you don’t have a specific goal for using them, Dror Zaifman, director of digital marketing for iCASH, a Canadian fintech company, told The Balance in an email. The deposit is considered safe and you can earn interest. Interest rates are determined by the government’s monetary policy, which is affected by inflation, liquidity, and other factors. Higher key interest rates mean the money market yields are higher, which means more money in your pocket if you’re invested in money market assets. “If you take a look at the other side of the coin, you will see that, if you’re a company that wants to borrow money, you would want to find an instrument with the lowest yield,” Ahren A. Tiller, a bankruptcy attorney with Bankruptcy Law Center, told The Balance. “This is because it will cost you less in terms of interest payments.”
