Overview
Loan contract details are specified in terms of calendar periods, days or months. However, issues surrouding calendar calculations can create complexities in calculating accrued interest.
Because different months may have a different number of days in them, but the payment per period is typically equal, the amount of interest earned on a single day cannot be a fixed amount. The day count convention was created in order to come to a common set of calculations that can be used to calculate the accrued interest.
Day Count Fraction
The convention to determine accrued interest is to calculate what is known as the day count fraction, which specifies the amount of accrued interest due according to the following formula.
{% Accrued \, Interest = Day \, Count \, Fraction \times Rate %}
The day count fraction is different, depending on the methodology used (which is specified by the bond contract terms)
The following is a sample of day count methods:
- {% 30/360 %} - assume there are 30 days in each month. a year has 360 days.
- {% 30E/360 %}
- {% actual/360 %} - fraction is the actual number of days divided by 360
- {% actual/365 %} - fraction is the actual number of days divided by 365
- {% actual/actual %}
let dc = await import('/lib/finance/fixed-income/v1.0.0/day-count.mjs');
let test = dc.fraction('2000-01-01', '2000-02-01', 'actual/360');