What is day count convention?

Day Count Convention are a specific method of generating 2 counts: days in a given date range and days in the related year. These 2 counts are used to construct the Day Count Factor, which is used to calculate the Accrued Interest of the given date range.

Accrued_Interest = Principal × Interest_Rate × Day_Count_Factor

For example, if you make a term deposit on January 1, 2026 with $1,000.00 as the Principal to a bank, which promises to pay you interest at a 5.0% annual rate, you normally would calculate the Accrued Interest between January 1, 2026 and January 16, 2026 as shown below:

Accrued_Interest = $1,000.00 × 5.0% × 15 / 365 = $2.0547945205479 = $2.05 

where: 
  $1,000.00: The Principal (the deposit amount)
  5.0%: The annual Interest Rate 
  15: Days between January 1, 2026 and January 16, 2026
  365: Days in the year 2026 

In this example, you are using a simple Day Count Convention that counts days in a given date range according to the calendar, and days in a year as a fixed value of 365. But many financial institutions in the world do not count days based on the calendar. They used different Day Count Conventions as described in next tutorials.

From this example, we can also derive a generic formula that calculates Accrued Interest for a given Accrual Range:

Accrued_Interest 
                                Days_in_Range 
  = Principal × Interest_Rate × -------------
                                Days_in_Year 
where: 
  Days_in_Range is the number of days in the Accrual Range 
  Days_in_Year is the number of days in the related Accrual Year 

From this formula, we can see that a Day Count Convention is really a method determine the ratio of Days_in_Range over Days_in_Year, which is called the Day Count Factor:

                   Days_in_Range 
Day_Count_Factor × -------------
                   Days_in_Year 

⇒ Interest Period and Interest Frequency

⇐ Introduction to Day Count Convention

⇑ Introduction to Day Count Convention

⇑⇑ Day Count Conventions