Breaking the Buck
Either successfully riding a bronco until it tires...or a decrease in the net asset value (NAV) of a money market fund to less than $1.00.
For purposes of this definition, let’s focus on the latter. Because money market funds are considered virtually risk-free, and regulations allow managers to hold the value constant at $1.00, a price below this level usually indicates a serious problem in the financial system. Yee-haw.
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Finance: What does "Breaking the Buck" M...5 Views
Finance allah shmoop what does breaking the buck mean Okay
so there's this dog and call of the wild Remember
him Alright Wait That's different and it wasn't broken He
just became wild at the end Right Isn't that what
happened All right well anyway breaking the buck in finance
land is about the price of a money market fund
as indexed to a dollar Well that is normally when
you invested dollar while you get more than a dollar
back Right Like a finance kindergarten concept One o one
in money market funds Thie investment is design id lee
Very low risk and low reward And it is purposely
set up to be extremely liquid and safe That is
that buck or dollar invested should almost always be sacred
And the pricing of a money market fund composed mostly
a very safe short term bonds Well it should always
be above that buck If it weren't it would mean
that you were getting less money than a dollar when
you invested a dollar And that would be bad right
And know that buck is the net asset value or
in a v of essentially all money market funds just
make the math easy here If nothing else if it
breaks the buck and trades below a dollar well then
it means that investors investing a dollar will in fact
get like ninety nine cents back or ninety eight cents
back Well how on earth can this happen Is it
fraud Deceit chicken ary Well those could be issues but
the breaking the buck phenomenon actually happened during the mortgage
crisis of two thousand nine when interest rates were extremely
low in fact so low that the throw or interest
from those bonds wasn't enough to cover the operating costs
of managing those money market funds There was a whole
lot of risk it that time to remember We thought
the financial system hopefully bust well is an extremely bad
situation for the bank which sold those funds as extremely
safe toe widows orphans and nervous nellies all around the
world with the cost of running One of these funds
isn't zero There are legal costs secretary cost brokerage costs
or spreads rent insurance all that stuff which is must
have in the world of managing a fund So when
rates fell extremely low and or the managers of that
fund took on all kinds of crazy weird derivatives risk
trying to goose another ten basis points of performance out
of their money market fund wealth They only found that
the results whipsawed and cut well pretty much their arms
and other appendages off It was potentially calamitous for the
banks and the brokers involved So breaking the buck is
a rare phenomenon in history It's happened only a few
times and when it did it was oh so bad 00:02:49.99 --> [endTime] That whipsaw is wicked That's gotta hurt