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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
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Bankrate.com |
Making a buck in money markets
Dear Dr. Don,
I have a substantial amount of money in Ford Motor
Credit Company's money fund. Their interest rate is the highest I
have found. What with the news that money funds are in jeopardy of
going below $1, should I deposit the money elsewhere for safety?
Socha Deal
Dear Socha,
The worry about money market mutual funds going below a dollar per
share in value is a real one, not because of credit risk but because
in the current interest rate environment, net of fees, it's hard
for the funds to eek out a positive return. "Breaking the buck,"
as it's referred to in finance jargon, is something that money market
mutual funds take great pains to avoid because their investor base
buys these funds for safety of principal and liquidity.
An investment in the Ford Money Market Account is a direct obligation
of the Ford Motor Credit Company and isn't insured by the FDIC,
nor is it a money market mutual fund. It's an investment in a floating
rate note issued by Ford Motor Credit structured to allow investors
to hold the note in an account held with Ford Motor Credit.
Ford guarantees that the account will pay at least
a quarter percent more than the seven-day average yield for all
taxable money funds that is reported weekly by the Money Fund Report
and published in The Wall Street Journal. Higher balances earn higher
rates.
You say that you have a substantial amount of money
invested in the account. As I write this reply, the Silver, Gold
and Platinum accounts yield 2 percent, 2.15 percent and 2.30 percent
respectively. On Bankrate's 100
Highest Yields page for money market accounts, Virtual
Bank is offering 2.13 percent on a money market account that
is FDIC insured up to $100,000.
Unless your investment in the Ford
Money Market Account represents a small fraction
of your total wealth, it doesn't make sense for
you to invest a substantial amount of money in the
unsecured debt of Ford Motor Credit.
Editor's note: In April 2006, FDIC
deposit insurance coverage on retirement accounts
held at banking institutions was raised from $100,000
to $250,000. Non-retirement account FDIC deposit
insurance coverage remains at $100,000.
-- Posted: March 2, 2004
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