Day count conventions

The day count convention determines how interest accrues over time in a variety of transactions, including bonds, swaps, bills and loans. Interest is usually expressed to accrue at a rate per annum (the reference period). It is often due and payable at shorter intervals, usually a number of months (the interest period).

The day count convention regulates how the parties are to calculate the amount of interest payable at the end of each interest or other period. It is commonly expressed as a fraction. The numerator will be the convention for the number of days in the period - usually actual or a notional 30. The denominator is the convention for the number of days in the reference period - often 360 or 365.

Conventions vary, depending on the market type and location, and the currency in question. For example, euro-denominated bonds are usually calculated on an actual/actual basis, while fixed rate non-euro denominated bonds are often calculated on a 30/360 basis. The London interbank market, on the other hand, operates on the basis of actual/360, except where the currency is sterling, for which the London interbank convention is actual/365.

Commonly used day count conventions are considered below, but first it is important to bear in mind the various business day conventions that may apply. These regulate the start and end date of each period.

=Business day conventions

�*No date adjustment Cycle dates are not adjusted for weekends or holidays and are forced to land within a cycle month.

�*Following business day/next good business day Dates are adjusted for weekends and holidays to the next good business day.

• Preceding/previous good business day

Dates are adjusted for weekends and holidays to the previous good business day.

�*Modified following/modified business day Dates are adjusted to the next good business day unless that day falls in the next calendar month in which case the date is adjusted to the previous good business day.

�*End of month – no adjustment Dates are adjusted to land on last day of the month.

• End of month – previous good business day

Dates are adjusted to the last day of the month but if that day is a weekend or holiday, then it is adjusted backward to the previous good business day.

�*Two business days prior to third Wednesday of month Dates generated are two business days prior to the third Wednesday of the month (used in conjunction with Eurodollar futures).

�*Deposit rollover method Each date is set so it occurs on the same day of the month as the previous date. Each date is set to the next good business day but no dates may be adjusted past the last good business day of the month.