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-   -   How Does a Money Market Account Work? (http://archives2.twoplustwo.com/showthread.php?t=399545)

Degen 12-16-2005 08:57 AM

How Does a Money Market Account Work?
 
I understand there is a bit more risk than standard savings accounts...why?

Also, how do these companies make money on the deposits while protecting against the short term need for withdrawals etc ?

Using ING and Emigrant as examples, how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

Who manages one of these? Is that a job title?


Any and all input appreciated.

SuitedPair 12-16-2005 10:34 AM

Re: How Does a Money Market Account Work?
 
A money market account is simply a mutual fund that is invested in short-term debt instruments. Just looking at JPMorgan’s Prime Money Market Fund (annual report happened to be laying around the office – I don’t work there and this is not an endorsement), its holding consists of:

1% - Asset Banked Securities
27% - Corp. Bonds
1% - Funding Agreements
3% - Gov’t Agency Securities
20% - CDs
24% Commercial Paper
19% Repos
5% Time Deposits

The yield that you get is a function of what the fund is invested in less an expense fee. This report is dated 8/31/05 and the fund yielded 3.22%. Because these are usually so large (this one $74 B) fees are usually low, about .5% in this case.

They are considered more risky because they have default risk, although it is minimized by the short-term nature of the securities held. I think there has only been one fund that has “broken a buck” but the mgmt company might have reimbursed the fund. I’ll check on that.

In order to handle withdrawals, the securities are liquid and the average maturity is very short, 44 days for the above fund.

These funds are managed by a fund manager usually there is a group of managers that manage several at a time. The annual report for the JPMorgan fund was for 6 total funds. The others are for specialized needs.

Federal Money Market – safer than the regular as it only invests in federal agency paper.
100% US Treasury – even safer than the Federal above.
Tax Free
California Municipal
New York Municipal

Sniper 12-16-2005 12:13 PM

Re: How Does a Money Market Account Work?
 
[ QUOTE ]
I understand there is a bit more risk than standard savings accounts...why?

[/ QUOTE ]

Money market accounts invest in very short term paper... there is a very small risk, but it is not secured, thus disclaimers.

[ QUOTE ]
Also, how do these companies make money on the deposits while protecting against the short term need for withdrawals etc ?

[/ QUOTE ]

Money Market accounts protect against withdrawal risk by being aware of their "normal" withdrawal related needs and timing their transactions so they are able to cover any needs. Also they usually have a line of credit to draw on in "unusual" circumstances.

[ QUOTE ]
Using ING and Emigrant as examples, how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

[/ QUOTE ]

These banks are usually taking your money on deposit and loaning it out to others. That is how they make their profit!

Uglyowl 12-16-2005 07:42 PM

Re: How Does a Money Market Account Work?
 
[ QUOTE ]
Money market accounts invest in very short term paper... there is a very small risk, but it is not secured, thus disclaimers.

[/ QUOTE ]

I think the original poster is referring to the bank vehicle called "money markets" that are just a savings account with a different name. For example, the ING Orange account is still FDIC insured and have no risk. (As opposed to a money market mutual fund)

[ QUOTE ]
Using ING and Emigrant as examples, how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

[/ QUOTE ]

These guys rely more on volumn and very low overhead as they are operating at a much smaller interest margin as a typical bank.

Still regardless the average loan earns slightly over 6% when factoring in default risk.

[ QUOTE ]
Also, how do these companies make money on the deposits while protecting against the short term need for withdrawals etc ?

[/ QUOTE ]

Banks do extensive analysis with asset liablity management. These include lots of "what-ifs" scenerios and how it will effect liquidity, profits, and capital ratios.

Here is a very basic description.

http://www.riskglossary.com/link/ass...management.htm


Degen 12-16-2005 07:49 PM

Re: How Does a Money Market Account Work?
 
[ QUOTE ]

I think the original poster is referring to the bank vehicle called "money markets" that are just a savings account with a different name. For example, the ING Orange account is still FDIC insured and have no risk. (As opposed to a money market mutual fund)

[/ QUOTE ]

this is what i meant, yes

Uglyowl 12-16-2005 08:07 PM

Re: How Does a Money Market Account Work?
 
ING invests mostly in mortgage-backed securities and a little in mortgage loans.

ING has an operating expense ratio of only 0.12% while most traditional banks are between 2.50%-3.50%.

You can search through their call report for more info if it interests you.

http://www2.fdic.gov/Call_TFR_Rpts/tocca...+++++++++++++++

Uglyowl 12-16-2005 08:54 PM

Re: How Does a Money Market Account Work?
 
[ QUOTE ]
ING has an operating expense ratio of only 0.12%

[/ QUOTE ]

My bad... that was only one quarter worth of expenses, so their expense ratio is a hair under 0.50%.

Degen 12-16-2005 09:04 PM

Re: How Does a Money Market Account Work?
 
[ QUOTE ]
ING invests mostly in mortgage-backed securities and a little in mortgage loans.

ING has an operating expense ratio of only 0.12% while most traditional banks are between 2.50%-3.50%.

You can search through their call report for more info if it interests you.

http://www2.fdic.gov/Call_TFR_Rpts/tocca...+++++++++++++++

[/ QUOTE ]

theoretically, they could invest in anything they wanted though right? if they saw fit, they could pull all of that out tomorrow and put it in tomato futures?


As a side note, just found out PayPal has a Money Market account...4.13%, a tad over Emmigrant

Uglyowl 12-16-2005 09:34 PM

Re: How Does a Money Market Account Work?
 
[ QUOTE ]
theoretically, they could invest in anything they wanted though right? if they saw fit, they could pull all of that out tomorrow and put it in tomato futures?

[/ QUOTE ]

Not all, the FDIC would not go for that. They have requirements that you may have only a certain percantage of their capital (retained earnings mostly) in "risk based assets".

buffett 12-17-2005 06:41 PM

Re: How Does a Money Market Account Work?
 
Degen, don't take this as a personal attack, 'cause it's not. This is more a general comment on the board...it seems like there's quite a few people here who are "playing at limits above their bankroll," to use a poker analogy. Be careful with your money.
Anyway....here are the two comments from Degen over the last few weeks that prompted this:
[ QUOTE ]
How Does a Money Market Account Work? .... how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

[/ QUOTE ]
[ QUOTE ]
100% GOOG

[/ QUOTE ]


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