What happens to a money market fund’s per-share market value if a credit ratings agency downgrades securities held by the fund?
A money market fund’s per-share market value can withstand large increases in the interest rate on a single security, such as the change that might be caused by a downgrade. For a security that comprises 5 percent of a fund’s portfolio, a 400 basis-point increase in its interest rate will reduce a fund’s shadow price by only 5 basis points, from $1.0000 to $0.9995. The impact on the shadow price is muted by Rule 2a-7’s diversification requirements, which allow a money market fund to invest no more than 5 percent of its assets with a single issuer.
