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Template:Business day conventions: Difference between revisions
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How one adjusts the [[calculation period]] for a given [[interest period]] to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. | How one adjusts the [[calculation period]] for a given [[interest period]] to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. | ||
There are two things you might wish to adjust here: one is '''settlement date for the interest ''payment''''' — that is, ''the day on which the interest payment is actually made'', the other is the '''duration of the [[interest period|interest ''period'']]''' — that is ''the day on which the [[interest period]] in question is [[deemed]] to end<ref>Which, to state the bleeding obvious, is also the date by reference to which the next period starts.</ref>'' | There are two things you might wish to adjust here: one is '''settlement date for the interest ''payment''''' — that is, ''the day on which the interest payment is actually made'', the other is the '''duration of the [[interest period|interest ''period'']]''' — that is ''the day on which the [[interest period]] in question is [[deemed]] to end.<ref>Which, to state the bleeding obvious, is also the date by reference to which the next period starts.</ref>'' | ||
Unlike [[day count | Unlike [[day count fraction]]s, [[business day convention|business day conventions]] are not applied in a standardised way across the industry: they are not tied to specific currencies or anything like that: it comes down to the basic preference of the institution calculating the [[interest rate]]. | ||
That said, [[fixed rate]] products are a lot less bother than [[floating rate]] products, and tend to be unadjusted. | That said, [[fixed rate]] products are a lot less bother than [[floating rate]] products, and tend to be unadjusted. | ||
*'''[[Fixed rate]] products - yeah whatever''': Folks tend to be fairly sanguine about interest payments for [[fixed rate]] interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the [[present value]] of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You | *'''[[Fixed rate]] products - yeah whatever''': Folks tend to be fairly sanguine about interest payments for [[fixed rate]] interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the [[present value]] of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can’t pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two’s interest on the interest, but you’ll make that up next time. | ||
*'''[[Floating rate]] products - hold on tiger''': [[Floating rate]] products are a bit more nuanced because there is some [[path dependent|path dependency]] here. The end of an interest [[calculation period]] determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates are — or, at least, in the good old days ''were'' — volatile, the product is [[path dependent]] and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping in Amazon rainforests and all that. | *'''[[Floating rate]] products - hold on tiger''': [[Floating rate]] products are a bit more nuanced because there is some [[path dependent|path dependency]] here. The end of an interest [[calculation period]] determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates are — or, at least, in the good old days ''were'' — volatile, the product is [[path dependent]] and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping in Amazon rainforests and all that. | ||
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*'''[[Modified following business day convention]]''': Cashflows falling on a non-workday are assumed to be distributed on the '''[[next]]''' [[business day]] unless it would fall in a different month, in which case it’s the '''[[previous]]''' [[business day]]. | *'''[[Modified following business day convention]]''': Cashflows falling on a non-workday are assumed to be distributed on the '''[[next]]''' [[business day]] unless it would fall in a different month, in which case it’s the '''[[previous]]''' [[business day]]. | ||
:'''[[End of month - no adjustment business day convention]]''': All cashflows are assumed to be distributed on the final day of the month (even if it is not a workday). | :'''[[End of month - no adjustment business day convention]]''': All cashflows are assumed to be distributed on the final day of the month (even if it is not a workday). | ||
:'''[[End of month - previous business day convention]]''': All cashflows are assumed to be distributed on the final day of the month ''unless it is not a workday'', in which case | :'''[[End of month - previous business day convention]]''': All cashflows are assumed to be distributed on the final day of the month ''unless it is not a workday'', in which case it’s the '''[[previous]]''' [[business day]]. | ||
:'''[[End of month - following business day convention]]''': All cashflows are assumed to be distributed on the final day of the month ''unless it is not a workday'', in which case | :'''[[End of month - following business day convention]]''': All cashflows are assumed to be distributed on the final day of the month ''unless it is not a workday'', in which case it’s the '''[[next]]''' business day. | ||