Blackrock Case

1. What is breaking-a-buck and what causes it? Find an example, by any means necessary, of a fund family taking a loss, or potential loss, to avoid it.

Breaking-a-buck refers to a situation when the NAV of a MMMF declines below $1 per share. This phenomenon is caused when the market-traded price per share (marked-to-market NAV), also referred to as the “shadow price,” of the asset declines to less than $1, making the valuation at amortized cost irrelevant.

One example of a fund taking a loss to avoid breaking-the-buck is the America Beacon MMMF, which temporarily limited all-cash redemptions of shares in its Money Market portfolio fund, instead offering “pro rata payments of cash and in-kind distribution of securities held by the fund, to prevent redemptions from forcing the sale of securities below their economic value and having a material impact on the funds and their remaining shareholders.”

2. Suppose we are in more normal times, and the Federal Reserve unexpectedly raises short rates by 50bp. What immediate effect would you expect this Fed action to have on the investments or withdrawals by money-fund shareholders?

If the Fed unexpectedly raised short rates by 50bp, investors’ required return on short instruments would increase. This results in an increase in the yield rate and a decrease in the value of short instruments. As a result, some money-fund shareholders may want to withdraw their money even if it may not be significant. Similarly, other investors would pump some money into the money-fund attracted by the increased return. Therefore, the net effect on the money-fund could be negligible as the withdrawals and investments would wash each other out.

3. Is the stability of money funds important to the general economy?

Yes. Lack of stability would negatively affect investors’ confidence and the liquidity of money funds, which are important sources of short-term financing for corporations or the economy at large. Per...