Daycount convention - Financial definition
Concise definition of the term daycount convention
Convention applied for the determination of the number of days in interest calculations.
Comprehensive definition of the term daycount convention
Daycount conventions are used for all financial instruments which contain an interest component. For negotiable securities like bonds, commercial papers or Treasury bills, the daycount convention applicable is part of the instrument's characteristics outlined in the prospectus. When dealing in OTC interest rate derivatives like swaps, caps or floors, it is agreed upon when the two contracting counterparties negotiate the transaction.
The daycount conventions are written in the form of a fraction, where the numerator expresses the number of days taken into account to determine the number on which interest is calculated, and the denominator expresses the number of days used to determine the interest period.
There is a certain number of conventions, of which the four most frequently used are detailed below.
Actual/Actual
Also stated as «Act/Act», «Act/nAct» or «bond basis».
This conventions consists of taking into account the actual number of days for interest calculation (numerator), and the actual number of days for the interest period (denominator) so that, when the interest period includes a 29th of February in a leap year, the value in the denominator will be 366.
This conventions consists of taking into account the actual number of days for interest calculation (numerator), and the actual number of days for the interest period (denominator) so that, when the interest period includes a 29th of February in a leap year, the value in the denominator will be 366.
Actual/365
Convention close to the bond basis, the difference being that the Act/365 convention does not take leap years into account, but rather considers all years having 365 days.
Actual/360
Also stated as «Act/360» or «monetary basis». This convention takes into account the actual number of days between the start and the end date of the application period (numerator) and considers each year as having 360 days.
This convention is applied for most monetary instruments and contracts, hence the name monetary basis.
30/360
Convention which consists of taking into account each month as having 30 days, and each year as having 360 days.
There are two distinct and slightly diverging version of this convention, one European and one American:
There are two distinct and slightly diverging version of this convention, one European and one American:
- 30/360 US ou 30/360 NASD
Rules:
- (1) If both the start date and the end date fall on the last day of February, then the end date will be changed to the 30th.
- (2) If the start date falls on the 31st of a month or last day of February, then it will be changed to the 30th.
- (3) If the start date falls on the 30th of a month after applying (2) above and the end date falls on the 31st of a month, then the end date will be changed to the 30th.
- 30/360 EU
If start or end date fall on a 31st of the month, they become the 30th of that month.
Comparative calculation example
Depending on the daycount convention applied, interest calculations may give different results. Let's consider for example a bond with a 4% annual coupon, detaching every April 25th.
Calculating the accrued interest for value June 25th, 2007, the results will be as follows:
Calculating the accrued interest for value June 25th, 2007, the results will be as follows:
| Convention | Accrued days | Interest period | Accrued interest |
| Actual/Actual | 61 | 366 | 0.6667% |
| Actual/365 | 61 | 365 | 0.6685% |
| Actual/360 | 61 | 360 | 0.6778% |
| 30/360 | 60 |
360 | 0.6667% |
1 5(April)+30(May)+25(June)
In order to calculate the number of days between two dates using the above daycount conventions, you can use our date calculator.