Why 0.01% and not 0% interest on money market funds?

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jt4
Posts: 64
Joined: Wed Feb 06, 2019 4:13 pm

Why 0.01% and not 0% interest on money market funds?

Post by jt4 »

For US financial firms, I find the minimum interest rate that they offer for various checking/savings accounts/money market funds is 0.01%.

Out of curiosity, why don't they just pay 0%? Why is 0.01% often the minimum??
Makefile
Posts: 2657
Joined: Fri Apr 22, 2016 11:03 pm

Re: Why 0.01% and not 0% interest on money market funds?

Post by Makefile »

Money market funds return whatever the market does. So if it stays at 0.01% and never drops to zero, that could be because the Federal Reserve is targeting short term interest rates that way. In fact, I've always understood the reason the rate is "zero to 0.25%" rather than just zero, is particularly because of the need to not wreck money market funds.
edit: I should add it might not quite be that way, as when interest rates are extremely low and drop below the expense ratio, the fund provider might be subsidizing the fund, and might subsidize just enough to 0.01%

As for bank savings accounts, the rate is indeed whatever the bank decides to pay. I wonder if a non interest bearing savings/money market account might violate Truth in Savings or a similar law in some way.
atdharris
Posts: 2091
Joined: Wed Jan 02, 2019 2:18 pm

Re: Why 0.01% and not 0% interest on money market funds?

Post by atdharris »

I've never understood it either. I think it's funny how BofA highlights the whopping 0.05% interest they offer platinum honors clients on savings accounts.
bonn
Posts: 121
Joined: Wed Mar 05, 2014 12:48 am

Re: Why 0.01% and not 0% interest on money market funds?

Post by bonn »

Google "Verizon math". Lots of people don't understand units and will read 0.01% as 1% or simply not understand what it means at all and just see that the bank is telling them that they will get some interest, which sounds nice.
S4C5
Posts: 443
Joined: Sat May 05, 2018 11:49 am

Re: Why 0.01% and not 0% interest on money market funds?

Post by S4C5 »

bonn wrote: Wed Dec 08, 2021 2:30 pm Google "Verizon math". Lots of people don't understand units and will read 0.01% as 1% or simply not understand what it means at all and just see that the bank is telling them that they will get some interest, which sounds nice.
A surprising portion of the population will say, almost with pride and certainly not shame, "oh, I don't DO fractions."
The same way they would say "I don't smoke" or "I don't curse." Like it's not something you believe in incorporating in your life.
Don't even get them started on the "decimals."

Now there is a push to make the country even more mathematically illiterate because the fact that it is hard is offensive to some people. We will see more of this sadly. Plenty of catastrophic errors have been caused in history because of decimal point errors. In medicine, a 10-fold error in dosing will often kill somebody.
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Why 0.01% and not 0% interest on money market funds?

Post by MrJedi »

If they pay 0.01%, they can call it an interest bearing account. Sounds better than a non interest bearing account. I don't know for sure but I would guess it is a marketing angle.
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