"Act/Act Bond" - Cross-Period Accrual

Q

How does "Act/Act Bond" convention works on an Accrual Range that crosses one or more Accrual Period boundaries?

✍: FYIcenter.com

A

When an Accrual Range crosses one or more Accrual Period boundaries, it needs to be split into multiple smaller parts, so that each part can fit into a single period.

Here is an example of US bond security:

CUSIP:                912810UE6
Issuer:               US Treasury
Interest rate:        4.5%
Interest frequency:   Semiannually (2 times in a year)
Day Count Convention: Act/Act Bond
Term:                 30 Years 
  Start Date:         2024-11-15
  Maturity Date:      2054-11-15

If you bought $1,000.00 of this US bond, here is how you can calculate Accrued Interest in the date range of [2024-11-30, 2024-05-31) using the Act/Act Bond convention:

1. Split the Accrual Range into multiple parts

R1 = [2024-11-30, 2025-05-15) within 
  P1 =[2024-11-15, 2025-05-15) Accrual Period 
R2 = [2025-05-15, 2025-05-31) within 
  P2 =[2025-05-15, 2025-11-15) Accrual Period 

2. Calculate Accrued Interest for each part

Accrued_Interest(R1) 
  = $1,000.00 × 4.5% × Day_Count_Factor(R1)
  = $1,000.00 × 4.5% × 0.5 × Calendar_Days(R1)/Calendar_Days(P1)
  = $1,000.00 × 4.5% × 0.5 × 166/181 
  = $20.635359116022

Accrued_Interest(R2) 
  = $1,000.00 × 4.5% × Day_Count_Factor(R2)
  = $1,000.00 × 4.5% × 0.5 × Calendar_Days(R2)/Calendar_Days(P2)
  = $1,000.00 × 4.5% × 0.5 × 16/184 
  = $1.9565217391304 

3. Sum up Accrued Interests from every part

Accrued_Interest 
  = Accrued_Interest(R1) + Accrued_Interest(R2)  
  = $20.635359116022 + $1.9565217391304 
  = $22.591880855152
  = $22.59

 

"Act/Act Bond" - Daily Compound Interest

"Act/Act Bond" - Whole Accrual Period

Day Count Convention - "Act/Act Bond"

⇑⇑ Day Count Conventions

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