Saturday, July 29, 2006

PayPal money market yield up to 5.00%

The 7-day yield for cash kept in the PayPal money market fund is now up to 5.00% as of July 26, 2006, versus 4.98% last week. That compares favorably with the 28-day Treasury T-bill "effective rate" of 5.01%from the latest Treasury Bill auction (versus 4.95% last week), 5.11% effective rate for a 3-month T-bill (versus 5.05% last week), 5.26% effective rate for a six-month T-bill (versus 5.15% last week), 4.46% 7-day yield in ShareBuilder (versus 4.64% last week), 4.88% 7-day yield in Fidelity Cash Reserves (FDRXX, versus 4.88% last week), or 4.43% 7-day yield in Fidelity Prime Reserves which Muriel Siebert uses for core cash in taxable accounts (versus 4.40% last week. And PayPal does not have any minimums or crazy restrictions even for relatively small amounts of money.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month.

For T-bills I quoted an "effective rate", which is a calculation of my own based on the discounted auction price for T-bills in the most recent weekly auction. Teasury gives a "discount rate" and an "investment rate" which don't seem to make a lot of sense. My "effective rate" calculation is as follows:

  1. Take the auction price, or "discounted price". This is the amount that the investor actually pays to Treasury to buy the T-bill. In exchange, Treasury will return $100 to the investor when the T-bill matures.
  2. Subtract the discounted price from the $100 "par price" and round to two decimal places since Treasury cannot actually return money to you in fractions of a penny. That is the "return" that you will receive upon maturity.
  3. Divide that return by the discounted price. That is the return as a percentage or "percentage return" over the life of the T-bill.
  4. Divide that percentage return by the number of days of "duration" of the T-bill's life, 28 or 91 or 182 days. That is the daily rate of return.
  5. Multiply that daily rate of return by 365. That is the (simple) annual rate of return, which I am calling the "effective rate".

As always, please note that these cash placed in these money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

-- Jack Krupansky


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