Break the buck

What is break the buck?

When the price of a share in a money market mutual fund dips below the $1-per-share price that it is supposed to hold, the fund is said to “break the buck.” This is bad for investors because they might lose principal.

Deeper definition

Money market funds are investment pools in which fund managers make very safe, short-term investments, such as government securities, Treasury bills and interbank loans. Investors typically purchase shares at the price of $1.

The money market also maintains a net-asset value of $1 per share. That price is based on the amount of money the fund has paid for the assets it holds, which is known as the book price. If a fund has 1 million shares, the book price of its assets are worth $1 million. Though fund managers invest in low risk, short-term assets whose prices don’t fluctuate much, the market value of the assets do change.

When the market value of the assets held by the fund falls below $1 per share, the fund has broken the buck. In reality, asset values can dip slightly below $1 — about half of one penny per share — before fund managers must take action.

Such instances are rare and usually occur only when the wider economy is severely troubled.

Break the buck example

The most famous example of a fund breaking the buck was in 2008, in an event that touched off the Great Recession. For years, The Reserve Primary Fund was one of the safest and most prominent money market funds. It was managed by The Reserve, a New York cash management firm that practically invented the money market fund. About 1.2 percent of The Reserve Primary Fund’s assets were invested with Lehman Bros., the prestigious Wall Street investment bank. When Lehman Brothers collapsed in September 2008, the fund saw $785 million in Lehman holdings reduced to zero. The Reserve Primary Fund’s net asset value fell to 0.97.

Other Investing Terms

Prudent investor rule

Prudent investor rule is a term every investor should understand. Bankrate explains it.

Fiduciary rule

The fiduciary rule describes what a financial advisor can do with your money.

Repurchase agreement (repo loan)

A repurchase agreement is a short-term loan to raise quick cash. Bankrate explains.

Derivative

Derivative

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