imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| 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).
| | 1. ''Financial reporting - accounting practices.'' |
|
| |
| The day count (or 'daycount') 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.
| | Accounting depreciation spreads the cost of a long-term tangible asset over its total life. |
|
| |
| Conventions vary depending on the market type, 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 depreciation accounting charge reflects: |
| | * the estimated periodic cost to a business |
| | * of a physical capital asset |
| | * spread over its estimated useful economic life. |
|
| |
|
| 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==
| | Accounting depreciation seeks to ensure that the total accounting cost of a capitalised asset is appropriately spread and matched to the economic benefits of using the asset. |
|
| |
|
| ====No date adjustment====
| | Accounting depreciation is applying the accruals accounting principle to spread the total cost of tangible long term assets over their expected useful life. |
| 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====
| | Methods of spreading the total accounting cost include Straight line, Reducing balance and Sum of the digits. |
| Dates are adjusted for weekends and holidays to the previous good business day.
| |
|
| |
|
| ====Modified following/modified business day====
| | Financial reporting standards generally permit the use of any systematic basis of allocating the total cost over the useful life of the asset. |
| 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====
| | It's important to be clear about the distinction between the: |
| 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.
| | *Depreciation charge for the period, reflected in the income statement; and |
| | *Cumulative depreciation provision at the end of the period, reflected in the balance sheet. |
|
| |
|
| ====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====
| | The depreciation charge is an in-period accounting expense, charged against profits for the period. |
| 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.
| |
|
| |
|
| ==Day count conventions and conversions==
| | The cumulative provision for depreciation is a liability in the balance sheet. It's offset against the cost of the assets, to calculate their accounting net book value. |
|
| |
|
| Interest is calculated as the principal times the interest rate times the day-count fraction, where the day-count fraction is defined by the day-count convention associated with the interest rate.
| |
|
| |
|
| ====Money market basis (actual/360)====
| | Some accounting jurisdictions use the term ''amortisation'' both for this aspect of accounting both for tangible and intangible assets. |
| This basis is commonly used for all Eurocurrency LIBOR rates, except sterling. The day count fraction is defined as the actual number of days in the period over 360.
| |
|
| |
|
| ====Actual/365 fixed====
| |
| This basis is commonly used for all sterling interest rates, including LIBOR.
| |
|
| |
|
| The day count fraction is defined as the actual number of days in the period over 365.
| | 2. ''Foreign exchange''. |
|
| |
|
| It is also used for money markets in Australia, Canada and New Zealand.
| | A decrease in the value of a currency. |
|
| |
|
| This basis is sometimes confused with actual/365, which is defined next.
| |
|
| |
|
| ====Actual/365 or actual/actual====
| | 3. ''Other contexts.'' |
| This basis is commonly used for all sterling bonds, Euro denominated bonds, US Treasury bonds and for some USD interest rate swaps.
| |
|
| |
|
| In this case, the day-count fraction is the number of days in the period in a normal year over 365 or the number of days in the period in a leap year over 366.
| | More generally, any decrease in the value of an asset resulting from the passing of time. |
|
| |
|
| ====Eurobond basis (30E/360)====
| |
| 30E/360 is used for calculating accrued interest on some legacy currency pre Euro Eurobonds and on bonds in Sweden and Switzerland.
| |
|
| |
|
| This method assumes that all months have 30 days, even February, and that a year is 360 days. Effectively if the start date d1 is 31 then it changes to 30, and if the second date d2 is 31 it too changes to 30.
| | == See also == |
| | * [[Accruals accounting]] |
| | * [[Accumulated depreciation]] |
| | * [[Amortisation]] |
| | * [[Appreciation]] |
| | * [[Assets]] |
| | * [[Capital allowances]] |
| | * [[Capitalisation]] |
| | * [[Carry trade]] |
| | *[[Cash flow]] |
| | * [[CertICM]] |
| | * [[Cost]] |
| | * [[EBITDA]] |
| | * [[IAS 16]] |
| | * [[Impairment]] |
| | * [[Intangible assets]] |
| | * [[International Fisher Effect]] |
| | * [[Net book value]] |
| | * [[Property, plant and equipment]] |
| | * [[Provision]] |
| | * [[Reducing balance]] |
| | * [[Revaluation]] |
| | * [[Straight line]] |
| | * [[Sum of the digits]] |
| | * [[Tangible asset]] |
| | * [[Tax depreciation]] |
| | * [[Writing down allowance]] |
|
| |
|
| The day count fraction is defined as the number of days in the period (Δ<sub>360</sub>) over where (Δ<sub>360</sub>) is calculated as if every month had 30 days, as described in Figure 1.
| | [[Category:Accounting,_tax_and_regulation]] |
| | | [[Category:Corporate_finance]] |
| [[File:Day count conventions figure 1.png||Bond basis (30/360) and Eurobond basis (30E/360)]] | |
| | |
| ====Bond basis====
| |
| This basis is used for calculating accrued interest on domestic US bonds (e.g. Yankee bonds, federal agencies, corporate and municipal bonds).
| |
| | |
| Each month is assumed to have 30 days, with an exception that if the last day is the 31st and the first day is not 30th or 31st then that month has 31 days.
| |
| | |
| So the rule is if d1 is 31 it changes to 30, and if d2 is 31 change it to 30 but only if d1 is either 30 or 31.
| |
| | |
| ====Floating rate notes====
| |
| FRNs always use actual/360 or 365 in the case of sterling.
| |
| | |
| ====Fixed coupon====
| |
| This basis is commonly used for Eurobonds, and the day count fraction is just one divided by the number of interest payments per year. Thus the coupon payments are always the same and any small difference in the number of days between successive coupon payments is ignored.
| |
| | |
| ====Conversion between different day count conventions====
| |
| | |
| [[File:Day count conventions figure 2.png||Conversion between different day count conventions]]
| |
| | |
| ==Compounding conventions==
| |
| | |
| ====Simple interest====
| |
| Simple interest does not offer the opportunity to earn interest on interest, ie, there is no compounding of
| |
| interest. Simple interest is typically used for instruments with a maturity of less than one year.
| |
| | |
| <math>Discount factor (DF) = \frac{1}{( 1+ R \times \frac{days}{year})}</math>
| |
| | |
| where:
| |
| | |
| :'''R''' = simple interest rate on an actual/365 or actual/360 fixed basis
| |
| :'''days''' = number of days in period
| |
| :'''year''' = number of days in a conventional year (365 or 360)
| |
| | |
| ====Compound interest for multiple periods====
| |
| Offers the opportunity for interest payments to be reinvested in order to earn interest on interest. Compound interest is typically used for instruments greater than one year.
| |
| | |
| <math>Discount factor (DF) = \frac{1}{(1+r)^{n}}</math>
| |
| | |
| where:
| |
| | |
| :'''r''' = periodic interest rate (<math>r = R \times \frac{days}{year}</math>)
| |
| :'''n''' = total number of compounding periods
| |
| | |
| ====Continuous compounding====
| |
| Compounding can be taken to an extreme in which the interest is continuously compounded. Continuously compounded rates are rarely quoted in practice for outright deposits or borrowings, although they are used extensively in valuing options.
| |
| | |
| <math>Discount factor (DF) = e^{-Rt}</math>
| |
| | |
| where:
| |
| | |
| :'''R''' = continuously compounded interest rate per year;
| |
| :'''t''' = number of years to maturity; and
| |
| :'''e''' = 2.71828 (to five decimal places).
| |
| | |
| ==Settlement day conventions==
| |
| | |
| The settlement day is the day on which traded bonds or securities actually change ownership and are paid for. This is often a few business days after the transaction date, T. Interest rate calculations normally start on the settlement day.
| |
| | |
| Settlement in Euro denominated bonds and in most markets is on T+3, although for US and UK government bonds and bills it is T+1, and for sterling bonds it is T+5.
| |
| | |
| | |
| ==See also==
| |
| * [[Day count]]
| |
| * [[ACT]]
| |
| * [[CertFMM]]
| |
| * [[Compound interest]]
| |
| * [[Effective annual rate]]
| |
| * [[LIBOR]]
| |
| * [[Nominal annual rate]]
| |
| * [[Periodic discount rate]]
| |
| * [[Periodic yield]]
| |
| * [[Simple interest]]
| |
| | |
| [[Category:Long_term_funding]]
| |
| [[Category:Cash_management]] | |
1. Financial reporting - accounting practices.
Accounting depreciation spreads the cost of a long-term tangible asset over its total life.
The depreciation accounting charge reflects:
- the estimated periodic cost to a business
- of a physical capital asset
- spread over its estimated useful economic life.
Accounting depreciation seeks to ensure that the total accounting cost of a capitalised asset is appropriately spread and matched to the economic benefits of using the asset.
Accounting depreciation is applying the accruals accounting principle to spread the total cost of tangible long term assets over their expected useful life.
Methods of spreading the total accounting cost include Straight line, Reducing balance and Sum of the digits.
Financial reporting standards generally permit the use of any systematic basis of allocating the total cost over the useful life of the asset.
It's important to be clear about the distinction between the:
- Depreciation charge for the period, reflected in the income statement; and
- Cumulative depreciation provision at the end of the period, reflected in the balance sheet.
The depreciation charge is an in-period accounting expense, charged against profits for the period.
The cumulative provision for depreciation is a liability in the balance sheet. It's offset against the cost of the assets, to calculate their accounting net book value.
Some accounting jurisdictions use the term amortisation both for this aspect of accounting both for tangible and intangible assets.
2. Foreign exchange.
A decrease in the value of a currency.
3. Other contexts.
More generally, any decrease in the value of an asset resulting from the passing of time.
See also
