Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Day-Count Convention

What it is:

A day-count convention is a method of counting the days between coupon dates.

How it works (Example):

Let's assume a $1,000 bond from Company XYZ has a 10% coupon, which means it pays out $100 a year. The bondholders get the $100 in two installments; that is, they get paid every six months.

It may sound simple to say, "six months from now, we'll send you a check," but what day is "six months from now"? Let's assume today is January 1. Various dates equate to "six months from now":

  • If you simply choose the sixth month of the year, you get June 1.
  • If you divide 365 days by two and add the result to January 1, you get July 2.
  • If you assume there are 30 days in a month (times six months), you get May 31.

None of these consider that it might be a leap year, either.

As you can see, the method for calculating "six months from now" needs defining. For this reason, bond issuers set forth day-count conventions.

Why it Matters:

The most common kind of day-count convention is the 30/360 convention, which assumes that there are 30 days in each month and therefore just 360 days in a year. However, conventions vary by instrument, and it's important to understand how interest is calculated before investing. Day-count conventions also determine how loan interest, swaps and other debt-based vehicles work. In turn, they influence the calculations of returns from those investments.
 

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