Day-Count Convention
Day-count conventions are standardized rules for counting the number of days between two dates when calculating interest, accrued interest, or present value for financial instruments. They determine the denominator and numerator used in interest formulas and therefore affect pricing, cash flows, and valuation.
Why day-count conventions matter
- They determine how much interest accrues between coupon or payment dates.
- Small differences in day counts can change cash flows and present values, so matching conventions is essential in contracts, pricing models, and trade confirmations.
- Different instruments, markets, and currencies commonly use different conventions.
Basic interest formula
Interest for a period is typically computed as:
Interest = Principal × Rate × (Number of days in period / Day-count basis)
Explore More Resources
The choice of “Number of days” and “Day-count basis” depends on the convention.
Common conventions and how they work
- 30/360
- Treats every month as 30 days and the year as 360 days.
- Standardizes month lengths, simplifying calculations for fixed-rate instruments.
-
Variants exist (e.g., US 30/360, European 30/360) that differ in end-of-month handling.
-
30/365
-
Treats every month as 30 days and the year as 365 days.
-
actual/360
- Uses the actual number of days in the period as the numerator and 360 as the denominator.
-
Common in money markets and many floating-rate instruments.
-
actual/365
-
Uses the actual number of days in the period and 365 as the denominator.
-
actual/actual
- Uses the actual number of days in the period and the actual number of days in the year (365 or 366).
- Common for U.S. Treasury securities and some government bonds.
Use by instrument and market
- Bonds and notes
- U.S. Treasury securities: actual/actual.
-
Many fixed-rate bonds: 30/360 or 30/365 (depending on market convention).
-
Money market deposits and floating-rate notes
- Typically actual/360.
-
Major exception: British pound–denominated instruments typically use actual/365; some related currencies (Australian, New Zealand, Hong Kong dollars) follow the 365 convention.
-
Interest rate swaps
- Fixed-rate leg: often 30/360 or 30/365.
- Floating-rate leg: typically actual/360 or actual/365, chosen to match market practice associated with the fixed leg.
-
Examples:
Explore More Resources
- USD, EUR, CHF fixed legs often use 30/360.
- GBP and JPY fixed legs more commonly use 30/365.
- Australia, New Zealand, and Hong Kong typically follow the UK standard.
-
Reference rates (historical note)
- LIBOR was commonly calculated on an actual/360 basis for most currencies, with GBP being the exception (actual/365).
- LIBOR publication has been largely phased out (2021–2023) and markets have transitioned to alternative reference rates; counterparties now specify the applicable reference rate and day-count behavior in agreements.
Practical implications
- When comparing yields or pricing instruments, ensure the same day-count basis is used.
- Mismatched day-count conventions between counterparties can lead to small but material cash-flow differences; conventions are typically specified in trade confirmations and ISDA documentation.
- For modelers and traders, convert cash flows to a consistent convention before aggregating or comparing.
Key takeaways
- Day-count conventions standardize how days are counted for interest calculations and affect accrued interest and valuation.
- Common conventions: 30/360, 30/365, actual/360, actual/365, actual/actual.
- Different instruments and currencies adopt different conventions — verify the convention before pricing or settling trades.
- Market practice and legal documentation (e.g., ISDA, bond prospectuses) determine which convention to use.