Money Market Rate

The money market rate is the short-term interest rate as determined by the open trading market in short-term debt securities. These short-term securities include diverse investments including Treasury bills, asset-backed securities, bank CDs, commercial paper, and many other security types. Money market rates vary depending on overall economic conditions. For instance, during economic downturns, money market rates are traditionally lower; in more favorable financial situations, higher money market rates typically are prevalent.

How money market rates work


Money market deposit accounts are a valuable source of short-term liquidity on the national and international financial markets. Essentially, bank customers deposit money into a money market account at a variable rate of interest. The funds are then invested in low-risk, short-term securities; essentially, the banks lend money to preferred-risk customers at a slightly higher variable rate of interest. Thus, the current money market rate is directly tied to the rate at which banks and other major financial institutions can lend money profitably.

Why money market rates vary from institution to institution


Not all banks are managed in the same way. Because money market rates are determined by the amount the market will currently bear, banks are free to set their own rates for money market accounts and money market lending. A bank that pays considerably more in interest to its money market deposit account customers will quickly accumulate a large pool of ready cash for lending; however, the bank will be hard-pressed to find borrowers for its loans due to the higher interest rate it must then charge in order to maintain profitability. Conversely, a bank that offers a lower money market rate will attract fewer depositors and will lack funds for originating these necessary loans.

Finding the best money market rates


Because the money market rate a bank pays its depositors is integrally linked to the rate it charges for short-term loans, the highest money market rates for depositors are generally offered by the banks and financial institutions that practice the most cost-efficient management policies. Some of the highest money market rates are available only as teaser rates, short-term rates intended to attract new customers that typically last only a few months. In most cases, however, the best money market rates are available from large, well-managed banks and lending institutions that can spread their profit margin over a great many investments and depositors. Time and amount of money deposited are also factors in determining the money market rate available to a specific individual; depositors who are willing to commit to a longer term commitment or to deposit a larger sum of money often receive the best money market rates available from a given institution.
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