Business day convention - Financial definition
Concise definition of the term business day convention
The business day convention determines how to proceed when a date which is relevant for the payment or calculation of interest falls on a non business day.
Comprehensive definition of the term business day convention
The following business day conventions exist:
- Actual (or Fixed)
The date in question is maintained, even if it is a non-business day. - Following
The event in question is moved to the immediately following business day. - Modified Following
The event in question is moved to the immediately following business day, provided that the latter is not in a different calendar month. Should that be the case, the event will be moved forward to the immediately preceding business day instead.
This convention is the one that is by far the most frequently used. - Preceding
The event in question is moved to the immediately preceding business day. - Modified preceding
The event in question is moved to the immediately preceding business day, provided that the latter is not in a different calendar month. Should that be the case, the event will be moved to the immediately following business day instead.
Both the modified following and modified preceding conventions are often used for accounting reasons, in order to avoid affecting monthly closings.