investing

Higher interest rate may require risk

Don Taylorq_v2.gifDear Dr. Don,
Do you think a Ford money market account is a safe investment at this time?

Before the economic downfall at the end of 2008, I had two accounts with them and earned a nice rate of interest. As soon as the banks and auto manufacturers started to publicly have problems, I withdrew my money and closed those accounts. Meanwhile, I believe they have sustained, though the rates now are not as great as they were then. Still, they are better than what I can find with an FDIC-insured bank.

What factors should I be looking at to determine whether this investment is safe? And how likely is it that I would actually lose any of my initial investment? I am assuming that is the major concern.
-- Jordanna Juncture

a_v2.gifDear Jordanna,
Ford Credit doesn't offer a money market account. In fact, it promised the Securities and Exchange Commission back in 2005 that it wouldn't come close to offering one. (See the SEC press release, "SEC Charges Ford Credit with Unlawful Marketing of 'Ford Money Market Account.'")

What it does offer is the Ford Interest Advantage account, which is an investment in floating rate demand notes. The interest rate paid on these notes fluctuates weekly with changes in the seven-day average yield for all taxable money funds as reported each week in iMoneyNet's Money Fund Report.

Read the prospectus for this investment to understand the risks you're taking on. It lists the following key factors to consider before investing in the notes:

  • Your investment is not a bank account and is not insured by the Federal Deposit Insurance Corp. or any other insurance.
  • The notes are not an investment in a money market mutual fund and are not subject to the requirements of the Investment Company Act of 1940 (including requirements relating to diversification and quality of investments).
  • The notes are not obligations of or guaranteed by Ford Motor Co., the Agent Bank or anyone else.
  • The notes are unsecured obligations of Ford Credit and only Ford Credit's assets that have not been sold or securitized are available to pay the principal of and interest on the notes. It is possible for you to lose some or all of your investment in the Notes, including accrued interest, if Ford Credit is unable to pay its debts, becomes bankrupt or seeks creditor protection.
  • The notes are not transferable.

The prospectus also provides Ford Credit's credit ratings from several rating agencies. The ratings as available are noninvestment grade with a negative outlook.

You'll have to decide for yourself if it's worth the risk for the pickup in yield over an FDIC-insured bank deposit -- you aren't going to get Dr. Don to tell you not to worry and that things will be OK.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Dr. Don columns for additional personal finance advice. To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money."

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