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Finance: What does "Breaking the Buck" Mean? 7 Views


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Description:

What does “Breaking the Buck” mean? Breaking the buck means that a money market fund’s value has dropped to less than $1. This happens because of drastic drops in interest rates or huge losses that outweigh fund income.

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English Language

Transcript

00:00

Finance allah shmoop what does breaking the buck mean Okay

00:06

so there's this dog and call of the wild Remember

00:10

him Alright Wait That's different and it wasn't broken He

00:13

just became wild at the end Right Isn't that what

00:16

happened All right well anyway breaking the buck in finance

00:19

land is about the price of a money market fund

00:23

as indexed to a dollar Well that is normally when

00:27

you invested dollar while you get more than a dollar

00:30

back Right Like a finance kindergarten concept One o one

00:34

in money market funds Thie investment is design id lee

00:37

Very low risk and low reward And it is purposely

00:42

set up to be extremely liquid and safe That is

00:46

that buck or dollar invested should almost always be sacred

00:51

And the pricing of a money market fund composed mostly

00:54

a very safe short term bonds Well it should always

00:58

be above that buck If it weren't it would mean

01:01

that you were getting less money than a dollar when

01:04

you invested a dollar And that would be bad right

01:07

And know that buck is the net asset value or

01:10

in a v of essentially all money market funds just

01:14

make the math easy here If nothing else if it

01:16

breaks the buck and trades below a dollar well then

01:20

it means that investors investing a dollar will in fact

01:23

get like ninety nine cents back or ninety eight cents

01:27

back Well how on earth can this happen Is it

01:29

fraud Deceit chicken ary Well those could be issues but

01:33

the breaking the buck phenomenon actually happened during the mortgage

01:36

crisis of two thousand nine when interest rates were extremely

01:41

low in fact so low that the throw or interest

01:45

from those bonds wasn't enough to cover the operating costs

01:49

of managing those money market funds There was a whole

01:52

lot of risk it that time to remember We thought

01:55

the financial system hopefully bust well is an extremely bad

01:59

situation for the bank which sold those funds as extremely

02:03

safe toe widows orphans and nervous nellies all around the

02:07

world with the cost of running One of these funds

02:09

isn't zero There are legal costs secretary cost brokerage costs

02:13

or spreads rent insurance all that stuff which is must

02:17

have in the world of managing a fund So when

02:20

rates fell extremely low and or the managers of that

02:23

fund took on all kinds of crazy weird derivatives risk

02:27

trying to goose another ten basis points of performance out

02:31

of their money market fund wealth They only found that

02:33

the results whipsawed and cut well pretty much their arms

02:37

and other appendages off It was potentially calamitous for the

02:40

banks and the brokers involved So breaking the buck is

02:43

a rare phenomenon in history It's happened only a few

02:46

times and when it did it was oh so bad 00:02:49.99 --> [endTime] That whipsaw is wicked That's gotta hurt

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