PayPal money market yield up to 5.02%

The 7-day yield for cash kept in the PayPal money market fund is now up to 5.02% as of August 1, 2006, versus 5.00% last week. That doesn't compare as favorably with the 28-day Treasury T-bill "effective rate" of 5.19% from the latest Treasury Bill auction (versus 4.99% last week), but is comparable to the 5.04% effective rate for a 3-month T-bill (versus 5.04% last week) and the 5.04% effective rate for a six-month T-bill (versus 5.13% last week). It is significantly better than the 4.49% 7-day yield in ShareBuilder (versus 4.46% last week), modestly better than the 4.93% 7-day yield in Fidelity Cash Reserves (FDRXX, versus 4.88% last week), and significantly better than the 4.44% 7-day yield in Fidelity Prime Reserves which Muriel Siebert uses for core cash in taxable accounts (versus 4.43% 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 example, I would be unable to move all of the cash in my Siebert taxable account to PayPal in one month. Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

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" (or what I call the "annualized effective interest 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" or "annualized effective interest rate". Whether the multiplier should be 365.25 or 366 or 366 if February 29 occurs in the coming 12 months is unclear, but I simply use 365.

As always, please note that cash placed in 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.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky