Day Count Convention

Overview
The Day Count Convention is a system that is employed in order to determine the number of days between two coupon dates. This time period is extremely important in calculating the payments of a variety of investment options.

Following are the principal forms of investment assets that are covered by the Day Count Convention system:

FRAs
Bonds
Medium-Term Notes
Notes
Swaps
Loans

Important Terms

Some of the important terms associated with the Day Count Convention are:
Interest
Days
CouponFactor
EOM
CouponRate
Factor
Date 1
Freq
Date 2
Principal
Date 3

Interest is the payment that could be received by an investor from his investment portfolio. The CouponFactor is the factor that is used to determine interest that the issuer pays on the specified dates of coupon payments.

The CouponRate is the rate of interest on a particular loan or security. Date 1 is the initial date of collecting the interest payment. Date 2 is the date until which the interest payment is accumulated. In case of bond trades, Date 2 is the day when the deal is decided.

Date 3 is the date of payment on the coupon. It comes after Date 2. EOM shows that interest would be paid on the concluding day of the particular month. Factor is a figure that represents the CouponRate amount that would be used in order to compute the interest. Freq is the frequency at which the coupon payment is made. Principal is the face value of the particular investment.
Methods

The Day Count Convention system uses the following methods of 30/360:

30E+/360
30/360 US
30E/360 ISDA
30E/360
The Day Count Convention uses the following Actual methods:

Actual/Actual ICMA
Actual/360
Actual/Actual ISDA
Actual/365L
Actual/365 Fixed
Interest Calculation
In case of all the various types of Day Count Convention the interest is computed as per the following formula:

Interest = Principal

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Last Updated on : 1st July 2013

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