Day Count Convention

Day count conventions are the mechanical rules for measuring time in bond interest calculations. Different markets and instruments use different conventions, which can produce noticeably different accrued interest and yield results for the same bond. Common conventions include: ACT/ACT (ICMA): Actual days / actual days in the period — used for US Treasuries; 30/360: Assumes every month has 30 days and the year has 360 — used for US corporate bonds; ACT/360: Actual days / 360 — common for money markets and floating rate notes; ACT/365: Actual days / 365 — used in UK and some Commonwealth markets. For example, 45 actual days of accrued interest on a 5% annual coupon under 30/360 gives 0.625% (45/360 × 5%), while ACT/365 gives 0.616% (45/365 × 5%). These small differences compound in present value calculations.