MONEY MARKET YIELD Meaning and
Definition
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Money market yield refers to the rate of return earned by investors in a money market instrument. It is a measure of the profitability or interest earned on short-term debt securities, such as treasury bills, commercial paper, and certificates of deposit. Money market instruments are highly liquid and considered to be low-risk investments.
Money market yield is expressed as an annual percentage, representing the annualized return on a money market investment. It is calculated by dividing the amount of annual interest income received by the investor by the investment's principal or face value.
The money market yield is an essential concept for investors and financial institutions to assess the potential returns on their short-term investments. It assists in comparing the profitability of different money market instruments and making informed investment decisions.
Factors that influence money market yields include prevailing interest rates, credit risk associated with the issuer of the instrument, and the time to maturity. Generally, money market yields tend to be lower than other types of investments due to their high liquidity and low default risk.
As a short-term investment vehicle, money market instruments play a crucial role in providing participants with liquidity, financing their short-term needs, and managing cash flows. Therefore, money market yield acts as a reference for determining the relative attractiveness of these investments and plays a significant role in the functioning of the money market.
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