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Day count conventions

 

  • Day count defines the way in which interest is accrued over time. Day count conventions normally used in US are:
    • Actual / actual->  treasury bonds
    • 30 / 360->  corporate bonds
    • Actual/360->  money market instruments
  • The interest earned between two dates

     

 

Examples

  • Actual / 360
    • The interest price of a 91-day T-bill is 9%. Find the dollar amount of interest paid over the 91 day period and the corresponding rate of interest
    • Dollar interest is $100*0.09*91/360 = $2.275
    • Rate of interest = 2.275/(100-2.275) = 2.328 %
  • Actual / Actual
    • A treasury bond with face value $100 pays a semi-annual coupon of 12%. Coupon payment dates are Mar 1 and Sept 1. Find the interest earned between Mar 1 & July 3
    • Reference period Mar 1 to Sept 1 is 184 days
    • Desired period is Mar 1 and July 3, is 124 days
    • Interest earned is 124/184*6 = $4.043
  • 30 / 360
    • A corporate bond with face value $100 pays a semi-annual coupon of 12%. Coupon payment dates are Mar 1 and Sept 1. Find the interest earned between Mar 1 & July 3
    • Reference period Mar 1 to Sept 1 is 6 months with each month @30 days =180 days
    • Desired period is Mar 1 and July 3, is 4*30 + 2 = 122 days
    • Interest earned is 122/180*6 = $4.0666

 





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