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 Dear
Dr. Don,
On one of my money funds they report a seven-day yield
of 4.48 percent. How do you calculate the APY on that? Or can't you?
-- Cindy Compounding
 Dear
Cindy,
Money market mutual funds invest in money market securities.
Money market securities typically have a maturity of 270 days or less, but any
short-term debt instrument with a final maturity of a year or less is considered
a money market security.
Money market mutual funds report
seven-day average income yields because the securities
in the fund change so frequently. The average
maturity of securities held in an SEC-registered
money market mutual fund must be 90 days or less,
but a money market fund can have a much shorter
average maturity. The reported seven-day
yield is an annualized rate, not only an APY.
Because all mutual funds report
on their seven-day yields, it becomes a way to
compare funds on a equivalent basis, such as APR
with mortgages and APY with savings. If you're
comparing money market yields, you do want to
know if the seven-day average income yield is
net of fund expenses. Bankrate reports the
seven-day effective yield, which is net of fund
expenses, on its taxable
money market mutual funds page.
For example, Vanguard's Treasury
Money Market Fund (VMPXX) has at this writing
a seven-day yield net of expenses of 4.83 percent
and an average maturity of 62 days. Vanguard
reports a compound yield of 4.94 percent, which
merely assumes monthly compounding of the seven-day
yield.
If you are comparing money market
fund yields, there is no need to convert these
yields to an APY for comparison. Where some
type of an adjustment is necessary is when you
compare the yields on a money market fund to a
money market account or a certificate of deposit.
In those cases Bankrate's certificate
of deposit calculator will calculate an APY
you can use to compare the investments.
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