Overview of Day Count Convention
The Day Count Convention is a system that is employed in order to find out the number of days that are there in between a couple of coupon dates. This time period is extremely important in the context of 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 Related to Day Count Convention
Some of the important terms that are regularly 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 supposed to be employed in order to find out the interest amount that the issuer pays on the specified dates of payment of coupons.
The CouponRate could be explained as the rate of interest of the particular agreement of a loan or a security. Date 1 is the initial date of collecting the interest payment. Date 2 could be explained as the date till 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 of coupon. It comes after Date 2. EOM is used to point to the fact that the interest from the payment would be paid on the concluding day of the particular month. Factor is a figure. It 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 Used by Day Count Convention
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 Day Count Convention
In case of all the various types of Day Count Convention the interest is computed as per the following formula:
Interest = Principal × Factor × CouponRate