Day Count Convention For Bonds

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The speaker explains what a day count convention for bonds is and reviews each of the three types; Actual/Actual, 30/360, and Actual/360.  Day count conventions vary by instrument type and country and are used to calculate accrued interest on a security. 
The speaker explains what a day count convention for bonds is and reviews each of the three types; Actual/Actual, 30/360, and Actual/360.  Day count conventions vary by instrument type and country and are used to calculate accrued interest on a security. 

Actual/Actual calculates interest by multiplying the coupon payment times the number of days since the last coupon payment divided by the total number of days between coupon payments.  This is most commonly used by US treasury bonds.

30/360 assumes that each month has 30 days and each year consists of 360 days.  The speaker walks through the calculation to calculate the coupon.  This type of day count is most commonly used with US corporate bonds.

Actual/360 is a combination of the two types we mentioned above.  The coupon is calculated by multiplying the coupon payment by the number of days since the last coupon payment divided by 360.  This type of day count is used when quoting LIBOR rates.

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