Know the rate basics of money market funds

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Don Taylor
Dear Dr. Don,
What is the meaning of these three rates that you list for money market accounts?

  • Annual percentage yield.
  • Intro rate.
  • Post-intro rate.

I thought I understood the first one. As for the other two, they're not familiar to me. This is something I need to know before I open an account.

Thanks for explaining!
-- Anton Accrues

Dear Anton,
The annual percentage yield, or APY, takes the nominal yield of the money market account and considers the impact compounding has on the realized yield. Most CDs compound interest daily. The nominal, or stated, yield is the yield used to calculate this daily interest payment. An investment that pays a 2 percent nominal yield, compounded daily, has an APY of 2.02. Financial institutions under the Truth in Savings Act, or TISA, are required to provide the APY when advertising the yield on deposit accounts so investors can more easily compare rates across banks.

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Sometimes a financial institution will post a teaser rate to attract business. As the name implies, the introductory rate won't last forever. When it ends, the account will earn the post-introductory rate.

I took a look at Bankrate's list of high-yield money market accounts and savings accounts. One of them is offering an intro rate of 1.4 percent for six months for first-time depositors of up to $50,000 in this account. The interest rate paid after the introductory period is 0.61 percent. The annual percentage yield on that account is 1.01 percent. That yield reflects six months' interest paid at 1.4 percent and six months' interest paid at 0.61 percent.

The 0.61 percent yield isn't guaranteed by the bank, since the post-introductory rate yield is actually a variable rate and will change with market conditions, but the bank guarantees that the yield will be in the top 5 percent of competitive accounts nationally as defined by the bank.

Some savers won't stick around after the introductory period if they can find a higher yield offered elsewhere. The bank hopes most account holders won't leave as the cost for the deposit goes down to the post-introductory rate.

Maybe your confusion relates to an inconsistency in how introductory rates are marketed. Some firms list the APY as the introductory rate with zero introductory months. Others list the introductory rate as zero percent and the introductory months as zero. The result in this case is about the same: no special introductory rate.

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