What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

Does the Interest Rate Change in a Money Market Account?

Original post by Linda Ray of Demand Media

Whenever you open a new bank account, you should take time to read the small print on the contract. While many rules rely on federally mandated laws, banks usually reserve the right to change their interest rates and account benefits without notice. Interest rates on money market accounts are tied to global financial markets as well as the profitability of the bank.


A money market deposit account operates like a savings account in that you deposit and withdraw money into it and earn interest on the savings. Money market accounts usually require a larger initial deposit because they typically pay higher interest rates. While many banks lock in an interest rate for a set period of time when you first open your account, rates are subject to change. You usually do not receive a formal notice when your rates have been adjusted.


While interest rates may fluctuate daily, usually in quarter-point increments, the Federal Deposit Insurance Corporation, or FDIC, insures your initial deposit. No matter what happens with the individual bank in which you place your money, your account is protected up to $100,000. The FDIC does not insure investment accounts such as life insurance and individual retirement accounts, or IRAs.


Money market accounts earn interest by an annual percentage yield, or APY, as mandated by the 1991 Truth in Savings Act. The amount of money you earn in interest each year takes into account the compounded interest you earned throughout the year. The means of calculating interest allows banks to use a standard method, making comparisons more valuable. An APY of .5 percent per month earns about 6.17 percent in a year because interest was added into the total. The APY provides a clearer picture of your earnings than the annual percentage rate of 6 percent, which doesn't figure in your compounded interest, making it more difficult to see the complete picture.


Banks can change interest rates to serve their own financial needs. For example, if they need to increase profits they may lower interest rates on savings vehicles, such as money market accounts. The interest rate also is tied to federal and global monetary policies made by the United States Federal Reserve that controls the flow of money. Banks pay interest on money they borrow and charge interest on money they loan. When interest rates change at the Federal Reserve, they affect local rates. At the same time, banks must remain competitive, which is why you'll see most money market interest rates within a fraction of each other at various institutions.



About the Author

Linda Ray is an award-winning journalist with more than 20 years of research and reporting experience. She has covered health care and fitness for newspapers and magazines, including the "Greenville News," "Success," "Verve" and "American City Business Journals." Ray has also reported on hospitals, commercial development and society. She holds a bachelor's degree in journalism.