The Desire For the Highest Money Market Rates

Obviously, people are wanting the greatest return on their investments. This is the reason to seek out the highest money market rates. When people express their longing for the highest market rates, it’s hard to tell if they are talking about APY (annual percentage yield) of money markets funds, or about APY of market accounts. These two investment channels – money market funds (MMFs) and money market accounts (MMAs) – both depend on the outcome of transactions taking place in the market, but they are entirely different things.

To understand the differences between the two, and to have an idea as to which of them is referred to in the investing public’s desire for highest money market rates, it’s good to review market fundamentals.

In the broadest arena there’s the financial market, the economic mechanism which brings people together so that they can trade -buy and sell – in what they call “commodities” and “financial securities”. Commodities are precious goods from gold and silver to wheat and dairy, while financial securities consist of things you often hear from business news on TV: stocks and bonds.

The financial market has component markets: stock market, bonds market, commodities market, and money markets.

In the financial market, the assets that are traded are papers that evidence indebtedness of large corporations. An illustration follows.

John borrows $1,000 from Peter and writes down on a piece of paper, “IOU $1,000 payable in 6 months with 2% interest”. That paper is evidence of John’s indebtedness to Peter. If Peter wants to make early money out of John’s IOU, he can go to the financial market and sell the IOU at a discount in order to attract a buyer. When sold to Paul at a selling price of $950, the discount is 5%. After 6 months Paul sells the IOU to Matthew for $980, and makes $30 from the sale. Finally, Matthew collects the $1,000 face value plus interest from John and makes a profit of $20 plus the interest on the IOU.

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