Day count fraction

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A day count fraction, actually is a deterministic means of calculating accrued interest for calculation periods shorter than a year. Different currencies and different interest rates have different conventions. The Numerator designates the number of days in the interest period in question; the denominator the number of days in the year. The day count fraction can then be multiplied by the notional amount and the interest rate to get the dollar amount of interest due.

Not to be confused with a business day convention, a travelling salespersons’ conference which usually takes place in Florida during the Hurricane Season.

The main day count fractions are:

• actual/actual: the actual number of days in the period divided by the actual number of days in the year (which will usually be 365, but may not be in a leap year)
• actual/365: the actual number of days in the period divided by the 365 (ie taking no account of leap years and other ad hoc modifications to the duration of a given year)
• 30/360: Keen observers will note this fraction simplifies down to 1/12 - that is, a round month's worth of interest. Used mainly for fixed rates, where it doesn’t really matter in which period a given day's worth of interest is paid, since it will be calculated exactly the same way anyway.

See also

• 1/12
• Actual/Actual
• Actual/365
• 30/360
• Calculation period
• business day convention

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