A client's statement can show two holdings that both say "money market." One is a bank deposit insured by the Federal Deposit Insurance Corporation (FDIC). The other is a security that can lose value, and many exam questions on cash turn on telling them apart.
A bank deposit is a debt the bank owes you. You get back your full principal plus interest, whatever the markets do.
Demand deposits are checking accounts a customer can draw on at any time without notice, by check, debit card or transfer. Savings accounts and money market deposit accounts (MMDAs) sit beside them. An MMDA pays a somewhat higher rate, often in exchange for a minimum balance or limited check writing.
Demand deposits, savings accounts and MMDAs are the most liquid, lowest-yielding cash a client holds. Liquid means the client can turn the asset into spendable cash quickly at a known value. The low rate is the price of that convenience.
TRAP: Unlike a money market mutual fund, which is a security, an MMDA is a deposit the bank owes you. The fund sells shares of an investment company.
Common mistakes
- Reading "money market" as insured: Only the MMDA is a bank deposit; the fund is an uninsured security.
- Figuring discount yield on price: $100 ÷ $9,900 × 360/91 gives 4.00%, which matches neither quote in Example 1. Discount yield uses face and 360 days (3.96%), and BEY uses price and 365 days (4.05%).
- Stacking SIPC limits: $500,000 + $250,000 = $750,000 is wrong. The $250,000 cash cap sits inside the $500,000.
Bottom line
- Checking, savings, MMDAs and bank CDs are FDIC-insured deposits; money market mutual funds are uninsured securities.
- FDIC insures $250,000 per depositor, per insured bank, per ownership category (single, joint, certain retirement, trust, business); branches add together, separately chartered banks do not.
- Since 2024-04-01, trust deposits are insured at $250,000 per beneficiary, five beneficiaries maximum, so $1,250,000 per owner per bank.
- SIPC restores missing property at a failed broker-dealer up to $500,000, of which no more than $250,000 may be cash, and never covers market losses.
Exam shortcut
When a stem says "money market," decide deposit or security before anything else. For FDIC math, sort dollars by bank first, then by ownership category, then by person, and cap each pile. For trusts, multiply $250,000 by the number of beneficiaries, never counting more than five.
The full lesson (about 3,331 words, 22 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B5
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