Day-Count Convention

A day-count convention is a set of rules used to calculate the number of days in a period for the purposes of calculating interest. The most common day-count conventions are the 30/360, the actual/360, and the actual/365.

The 30/360 day-count convention assumes that there are 30 days in every month, regardless of the actual number of days in the month. This convention is often used for loans that are repaid on a monthly basis.

The actual/360 day-count convention uses the actual number of days in the month to calculate the number of days in a period. This convention is often used for loans that are repaid on a daily basis.

The actual/365 day-count convention uses the actual number of days in the year to calculate the number of days in a period. This convention is often used for loans that are repaid on a yearly basis.

The choice of day-count convention can have a significant impact on the amount of interest that is paid on a loan. For example, a loan that is repaid on a monthly basis using the 30/360 day-count convention will have a higher interest rate than a loan that is repaid on a monthly basis using the actual/360 day-count convention.

It is important to understand the day-count convention that is being used when calculating the interest on a loan. This will ensure that you are not paying more interest than you need to.