Day-Count Convention

Definition

A day-count convention is the rule that converts calendar days into an accrual fraction for interest calculations. It tells you how to count days (numerator) and what to divide by (denominator).

Key Takeaways

• Directly affects accrued interest, dirty price, and reported yields.

• Always check the prospectus/term sheet; different bonds can use different rules.

• Common conventions: Actual/Actual (ICMA/ISDA), Actual/365 (Fixed), Actual/360, 30/360 (US/Euro/ISDA).

How to Read the Notation

• Actual/Actual (ICMA): use actual days; denominator = actual days in the coupon period. Common for many government bonds.

• Actual/365 (Fixed): use actual days; denominator = 365.

• Actual/360: use actual days; denominator = 360 (common in money markets).

• 30/360 (US/Euro): assume 30 days per month, 360 per year; has specific date-adjustment rules.

Quick Reference (summary)

Nigeria Note (practical)

Nigerian issues can vary (FGN, corporates, Sukuk). Do not assume—confirm the convention on the term sheet, NGX listing docs, or trading platform.

Illustrative Example

Last coupon: 1 May; next coupon: 1 Nov; settlement: 15 Aug.

• Under Actual/Actual:

  • Accrued days = actual days 1 May → 15 Aug

  • Period days = actual days 1 May → 1 Nov

  • Accrual fraction = accrued/period (e.g., 106/184)

• Under 30/360 (US):

  • Convert dates using 30/360 rules, then fraction = days/360 (e.g., 105/360)

Common Pitfalls

• Mixing conventions (comparing apples to oranges).

• Using Actual/365 when the bond specifies Actual/Actual (or vice versa).

• Ignoring different flavours of 30/360 (US vs Euro vs ISDA).

Mini-FAQ

• Which convention is “best”? None—use the one stated in the bond docs.

• Why do two traders get different accrued interest? They used different conventions.

• Does day-count affect YTM? Yes—through dirty price and timing of cash flows.

Related Terms

Accrued Interest · Clean Price · Dirty Price · Coupon · Yield to Maturity (YTM) · Settlement Date