Update on PayPal Money Market Fund: Mystery solved?

I have recently blogged about an apparent discrepency between the 7-day yield that is claimed for the PayPal Money Market Fund and the actual dividend I received for the month of July. I had contacted PayPal and gotten a standard "read the prospectus" reply and I responded by requesting that they escalate the issue to address my concerns in detail. I did some more digging and looking at my precise account history and I think I may have solved the mystery of the dividend discrepancy.

First, I discovered that even though I had made a deposit at the end of June, it was not credited to my account until July 5, 2007. The funds were debited from my Fidelity account on July 2, 2007, so PayPal had a couple of days of free float, but I think most of us are used to that kind of practice by now. Alas, even when I re-cranked the numbers I still came up with a dividend shortfall.

Next, I noticed that the date of the dividend payment was July 31, 2007, which I had assumed meant that the dividend was calculated for the full month, or at least through the day before. After all, the prospectus says that "The Fund declares a dividend on every Business Day. Dividends are credited to shareholder accounts monthly." Alas, one less day of interest was not even close to making up for the shortfall.

Special note: My account "history" shows the dividend being credited on August 2, 2007, while the money market "activity log" shows a "Accrual Income Div Reinvestment" on July 31, 2007. Again, a couple more days of free float for the fund or for PayPal.

Next, I challenged my assumption that the period over which dividends accrue was even necessarily the day or two before the date they were credited . The annoying thing is that the dividend payment does not disclose the precise daily period that it covered, leaving us to guess.

So, I guessed that maybe the dividend is paid 5 to 7 days after it is accrued. Yes, it is annoying that the fund might enjoy the few days of free float, but that is not so unusual.

If I assumed that the accrual period started six days before the start of July and did last for 31 days and that the 7-day yield averaged between 5.02% and 5.03%, say 5.025%, presto, I calculate an expected dividend within a quarter of a penny of what I received.

If true, one implication is that the dividend payment for a given month does not accrue compounded interest for the full coming month. According to my calculation, my June dividend only received 25 days of interest in my July dividend.

I have no confidence that my assumptions are actually correct, but I am confident that they are plausible, and they do in fact account for all of the shortfall.

I'll await direct confirmation from PayPal and recommend to them that they disclose the period over which the dividend accrued as well as the average daily balance, but for now I feel comfident that despite the uncertainty of the details, PayPal is in fact paying a dividend at the advertised rate, at least if you leave the full balance unchanged for more than a month.

Pending confirmation, I consider the mystery solved.

-- Jack Krupansky