Money Market Yield

Money Market Yield

Money market yield measures the annualized return on highly liquid, short-term securities (less than one year), such as Treasury bills (T‑bills), commercial paper, certificates of deposit (CDs), and municipal notes. It converts a holding‑period return to an annual rate using a 360‑day banking convention, making short‑term instruments comparable to other investments.

Key points

• Money market yield (MMY) annualizes the holding period yield using a 360‑day year.
• Common instruments: T‑bills, commercial paper, CDs, repurchase agreements, and money market funds.
• Money market instruments usually carry low default risk and therefore offer lower yields than stocks and longer‑term bonds but often higher rates than standard savings accounts.
• Typical yields vary with market conditions and account requirements; a common recent range is roughly 0.01%–4%.

How it works

Investors lend funds for short periods to institutions or governments and receive compensation in the form of short‑term interest. Pricing convention and annualization matter for comparing these returns:
* Holding period returns are based on purchase price and maturity (face) value.
* The 360‑day convention (banking year) is used to annualize yields for comparability with other quoted rates.

Formulas

Holding period yield (HPY)
HPY = (Face value − Purchase price) / Purchase price

Money market yield (MMY)
MMY = HPY × (360 / Time to maturity in days)

Combining:
MMY = [(Face value − Purchase price) / Purchase price] × (360 / Days to maturity)

Bank discount yield (BDY) — different convention (uses face value):
BDY = (Face value − Purchase price) / Face value × (360 / Days to maturity)

Conversion between BDY and MMY:
MMY = BDY × (Face value / Purchase price)

Example

A T‑bill with face value $100,000 sells for $98,000 and matures in 180 days.

1. HPY = (100,000 − 98,000) / 98,000 = 0.020408…
2. MMY = 0.020408 × (360 / 180) = 0.040816… ≈ 4.08%

This number differs from the bank discount yield because BDY uses face value in its denominator and therefore produces a different quoted rate.

7‑day yield

Money market funds commonly report a 7‑day yield: the fund’s income over the last 7 days annualized. It estimates short‑term performance and helps compare funds by normalizing a one‑week return to an annual basis.

Advantages and disadvantages

Advantages
* High liquidity and low credit risk relative to longer‑term securities.
* Useful for parking short‑term cash with modest returns.
* Easier comparability across short maturities via the 360‑day convention.

Disadvantages
* Yields are typically lower than those of long‑term bonds and many equity investments.
* Accounts or funds may impose transaction limits or minimum balances.
* Returns can be highly sensitive to short‑term interest rate moves.

Bottom line

Money market yield is a practical metric for annualizing and comparing returns on short‑term, liquid instruments. It is especially useful for investors managing cash or seeking low‑risk, short‑duration placements. Understanding the MMY and how it relates to other quoting conventions (like bank discount yield) helps in evaluating and comparing short‑term investment options.