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Sat. Aug. 9, 2008

The MMA Rate Mystery Solved *

Of all the Excel models, investing concepts, cash flow theories presented on Dividends4Life, none have been as misunderstood or caused more confusion than the money market account (MMA) rate. I have received many comments and emails inquiring about the rate. Most went something like “4.61%, are you out of your mind? Would you tell me where you found a MMA paying 4.61%?”

Inherently, financial valuations are forward looking. Unfortunately, the only hard data we have is historic, interest rates included. Theoretically, the MMA rate that I use is intended to represent the MMA rate that will be earned over then next 20 years. So how did I come up with the 4.61% that is currently being used?

I started the year at 5.11%, which was the rate that my highest MMA was paying. Then as rates began to fall I averaged the 5.11% with the current rate, limiting the change (plus or minus) to 0.5%, thus 5.11% – 0.5% = 4.61%. Given where rate are, this will not likely change this year.

What appears to be (and actually is) a 2-year MMA rate average that really should be 20-year projected rate really isn’t that far off. I validate the rate by comparing it to the 20-year U.S. Treasury rate, which ironically was exactly 4.61% on August 1, 2008.

I don’t really expect this will stop the questions and comments about my MMA Rate, but I now I have a post that I can point to to help explain what is happening.

(Photo: gerard79)

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