In finance, a day count convention determines how interest accrues over time for a variety of investments, including bonds, notes, loans, mortgages, medium-term notes, swaps, and forward rate agreements (FRAs).
[1] The day count is also used to quantify periods of time when discounting a cash-flow to its present value.
When a security such as a bond is sold between interest payment dates, the seller is eligible to some fraction of the coupon amount.
The need for day count conventions is a direct consequence of interest-earning investments.
Different conventions were developed to address often conflicting requirements, including ease of calculation, constancy of time period (day, month, or year) and the needs of the accounting department.
There is no central authority defining day count conventions, so there is no standard terminology, however the International Swaps and Derivatives Association (ISDA) and the International Capital Market Association (ICMA) have done work gathering and documenting conventions.
[3] There has also been a move towards convergence in the marketplace, which has resulted in the number of conventions in use being reduced.
In the case that it is a regular coupon period, this is equivalent to: The conventions are distinguished by the manner in which they adjust Date1 and/or Date2 for the end of the month.
The conventions are distinguished primarily by the amount of the CouponRate they assign to each day of the accrual period.
Other names are: Sources: Formulas: Each month is treated normally and the year is assumed to be 365 days.
Other names: Sources: Formulas: This convention is used in money markets for short-term lending of currencies, including the US dollar and Euro, and is applied in ESCB monetary policy operations.
Other names: Sources: Formulas: Each month is treated normally and the year is assumed to be 364 days.
Formulas: This convention requires a set of rules in order to determine the days in the year (DiY).
Other names: Sources: Formulas: This convention requires a set of rules in order to determine the days in the year (DiY).
This convention was originally written in French and during translation the term "Période d'Application" was converted to "Calculation Period".
As ISDA assigns a very specific meaning to "Calculation Period" (Date1 to Date3) confusion can ensue.
[8] The original French version of the convention contained no specific rules for counting back the years.
No source can be found explaining the appearance or rationale of the extra rule.
The Actual/360 method calls for the borrower for the actual number of days in a month.
Spreads and rates on Actual/360 transactions are typically lower, e.g., 9 basis points.
Another difference between 30/360 and Actual methods regards the additivity property of the Day Count Factor, i.e. given two subsequent time intervals
This property is relevant, for example, when one computes an integral over a time interval using a discretization rule.
Another convention states whether the calculation of the amount of interest payment or accrued interest within a coupon period must use the adjusted (aka bumped) or the unadjusted (aka unbumped) dates.