Day Counting
This provides a consistent and accurate way of pricing any securities that have an interest rate component.
A day-count convention is a standardized methodology for calculating the number of days between two dates.
Different securities use different conventions to count the days.
An individual would rather be paid interest based on actual/360 rather than 30/360 because, on average there are more than 30 days in a month.
Fixed Rates are generally quoted as actual/365 or 30/360
link - deltaquants.com/day-count-conventions
Different Conventions
| 30 / 360 (US) | Corporate Bonds, Municipal Bonds, Fixed Leg of Interest Rate swaps |
| 30 / 360 (European) | Corporate Bonds, Municipal Bonds, Fixed Leg of Interest Rate swaps (also referred to 360/360) |
| Actual / Actual | US Treasury Bonds, US Treasury Notes, US Treasury STRIPS |
| Actual / 360 | US Treasury Bills, LIBOR floating rate (also referred to as 365/360 or even 360/365) |
| Actual / 365 |
30 / 360 - US
Calculates interest using a 360 day year and then multiplies it by the days assuming every month has 30 days.
If the first date is the last day of February, then first date is changed to 30
If the first date has 31 days, then first date is changed to 30 days
If the first date has 30 or 31 days and second date has 31, then second date is changed to 30 days
If the first date is the last day of February (28 or 29) and second date is the last day of February, then second date is changed to 30 days
If the starting date is the last day of a month (28,29,30 or 31), then the 30th day of that month is used.
If the ending date is the last day of a month (28,29,30 or 31), then the 30th day of that month is used.
If the ending date is the last day of a month (28,29,30 or 31) AND the starting date is earlier than the 30th day of a month, then the ending date becomes the 1st day of the next month.
30 / 360 - European
Calculates interest using a 360 day year and then multiplies it by the days assuming every month has 30 days.
If the first date has 31 days, then first date is changed to 30 days
If the second date has 31 days, then second date is changed to 30 days
If the starting date is the 31st day of a month, then the 30th day of that month is used.
If the ending date is the 31st day of a month, then the 30th day of that month is used.
Actual / Actual
Actual / 360
Calculates interest using a 360 day year and then multiplies it by the actual number of days
Commonly used in money markets
Actual / 365
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