Money Market Account

November 23, 2010Money Marketby EconomyWatch



A Brief Introduction to the Money Market Account

The money market account is a high interest savings account. The money market account is most commonly known as the MMA . It is also known as the Money Market Demand account or the money market deposit account . In the money market account competitive rates of interest are offered in lieu of larger than average deposits.

Distinction between the money market account and the money market fund

There is a distinct difference between money market accounts and money market funds . The money market fund is an investment tool that earns higher returns as compared to premium savings account.

Mode of operation of the money market account

The money market account can be opened at any bank. The money that is kept in the bank is then invested into low risk, short term money market instruments like the Commercial Deposits, Certificate of deposit and T-bills. The money market account holder then earns interest for allowing the bank to make such money market investments.

The money market instruments in which the money from the money market account is invested can be explained as under:

  • Treasury Bills : The Treasury bills are the short term money market security that mature in a year or less than that. The purchase price is less than the the face value.
  • Certificate of Deposit: The certificate of deposit are basically time deposits that are issued by the commercial banks wit maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills .
  • Commercial Paper : Commercial Paper is short term loan that is issued by a corporation use for financing accounts receivable and inventories.
  • Banker's Acceptance: It is a short term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance are traded in the Secondary market.
  • Euro Dollars : The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S.
  • Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due to government backing.

The Federal Deposit Insurance Corporation provides insurance to the money market account of the bank upto $ 100,000.

Although the money market account is low risk account , there are certain restrictions attached to the money market account. The money kept in the money market account is less liquid as compared to the regular savings account. Unlike the regular savings account the money market account requires a minimum balance and a minimum deposit. One can withdraw as much required from the money market account but there are restrictions on the number of times one can withdraw money from the account. Withdrawal should be made in such a way that money does not fall below the minimum balance.

Find out more about Money Market Accounts as Cash Investments.

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