What Is the Daily Factor?
The daily factor is a decimal figure addressing the [annual yield](/normal annual-yield) of an investment. They are utilized to compare the return on investment associated with various securities.
Daily factors are much of the time reported alongside the current annualized yield figures and can be made an interpretation of back to the current yield percentage by increasing the daily number by 365.
How the Daily Factor Works
The purpose of the daily factor is to show the yield, or interest income, associated with a single calendar day. By convention, the daily factor is calculated either by utilizing a presumed 360-day year, or by utilizing a 365-day year. Investors ought to guarantee they comprehend which convention is being utilized while contrasting daily factors for various instruments.
Daily factors are in many cases utilized by large institutional investors, for whom a single-day's interest income could address a significant sum of capital. Another group that frequently utilizes daily factor citations are income-situated investors, for example, retired folks, who are dependent on customary cashflows from their investments. For these types of investors, the granularity of the daily factor calculation can be useful for keeping track of how much interest they are probably going to earn in a day, week, or other short period of time.
Two areas where investors are probably going to experience daily factor citations are in the market for bank certificates of deposit (CDs) and Treasury bonds. For instance, the daily factor for a certificate of deposit (CD) which trades for a current annual yield of 5.35 percent is .000147 (.0535/365=.000147). In this case, the CD would earn 1/10,000 of a penny each day.
Real World Example of the Daily Factor
Dorothy is a fruitful entrepreneur who as of late sold her business for $2 million in cash. In choosing where to invest these proceeds, she chooses to audit the corporate bonds issued by XYZ Corporation. The bonds have a face value of $1,000 and pay interest of 3% each year.
The XYZ bonds are currently accessible in the market at a discount, and can be purchased for just $800. Thusly, if she somehow managed to purchase the bonds, she would partake in a yield of 3.75% ($30 of interest partitioned by the $800 market price). Utilizing a 365-day year, Dorothy works out that the daily rate of this bond purchase would be roughly 0.01% each day (0.037 isolated by 365 days). Assuming 30 days out of each month, this would work out to around 0.30% each month, or $6,000 if Dorothy somehow managed to invest her full $2 million proceeds.
- The daily factor is utilized generally by income-cognizant investors, or by institutional investors working with extremely large sums.
- The daily factor is an approach to citing the yield of a bond.
- It shows the yield as a decimal addressing the interest for a single day.