Day-Count Convention

What Is Day-Count Convention?

A day-count convention is the system utilized on debt securities, like bonds or swaps, to compute the amount of accrued interest or the current value when the next coupon payment is under a full coupon period away.

Understanding Day-Count Convention

The day-count conventions apply to swaps, mortgages, and forward rate agreements as well as bonds. Large numbers of the rules and definitions for applying the day-count convention are set forward by the International Swap Dealers Association, which gives documentation to a great many financial transactions.

For instance, a settled upon day-count convention would be utilized to compute the amount of accrued interest or the present value (PV) when the next coupon payment is under a full coupon period away.

Among the most common conventions are 30/360, 30/365, genuine/360, real/365, and real/real.

• 30/360 - works out the daily interest utilizing a 360-day year and afterward duplicates that by 30 (normalized month).
• 30/365 - works out the daily interest utilizing a 365-day year and afterward duplicates that by 30 (normalized month).
• real/360 - computes the daily interest utilizing a 360-day year and afterward duplicates that by the genuine number of days in each time span.
• real/365 - computes the daily interest utilizing a 365-day year and afterward duplicates that by the genuine number of days in each time span.
• real/genuine - works out the daily interest involving the real number of days in the year and afterward duplicates that by the real number of days in each time span.

Each bond market and financial instrument has its own day-count convention, which changes relying upon the type of instrument, whether the interest rate is fixed or floating, and the country of issuance. Bonds and notes issued by the U.S. Treasury earn interest calculated on a real/genuine basis. This means the entire days in a period carry equivalent value; it likewise means the length of coupon periods and the resultant payments shift.

The interest on most money market deposits and floating-rate notes is calculated on a real/360-day basis. The major exception is those named in the British pound, for which interest is calculated on the real/365 basis. Currencies that are, or have been, closely connected with the British pound, like the Australian, New Zealand, and Hong Kong dollars, additionally utilize 365 days.

The fixed-rate leg of a interest rate swap and most fixed-rate bonds utilize either the 30/360-day convention or 30/365. This convention specifies the month will constantly be treated as having 30 days in it, and the year will reliably be treated as having either 360 or 365 days. Swap markets utilizing the 30/360 convention for the fixed rate of a swap incorporate the U.S. dollar, the euro, and the Swiss franc. Swaps in the British pound and the Japanese yen for the most part utilize the 30/365 convention; Australia, New Zealand, and Hong Kong again follow the United Kingdom.

The floating-rate leg of most interest rate swaps utilizes some variation of a real day count versus either a 360 or 365-day year. The markets that utilization 30/360 for the fixed-rate leg, which incorporate the U.S. Dollar markets, utilize real/360 for the floating-rate leg. Those that utilization 30/365 on the fixed-rate leg utilize genuine/365 on the floating-rate leg.

The London InterBank Offered Rate (LIBOR) is the most commonly utilized benchmark interest rate and is posted daily at 11:45 a.m. London time.

The Intercontinental Exchange, the authority responsible for LIBOR, will stop distributing one-week and two-month USD LIBOR after Dec. 31, 2021. Any remaining LIBOR will be discontinued after June 30, 2023.

For most currencies, interest at LIBOR is calculated on the real/360-day basis; the major exception is again the British pound, which is calculated on the genuine/365-day basis.

Features

• A day-count convention is a normalized methodology for computing the number of days between two dates.
• The interest on most money market deposits and floating-rate notes is calculated on a real/360 day-count convention while bonds and notes issued by the U.S. Treasury earn interest calculated on a genuine/real basis.
• The fixed-rate leg of an interest rate swap and most fixed-rate bonds utilize either the 30/360 or 30/365 day-count convention while the floating-rate leg utilizes some variation of a genuine/360 or 365 day-count convention.