Day count conventions are the standardized rules that decide how interest accrues between two dates on a loan, bond, or other interest-bearing instrument. Each convention sets two things: how many days are counted in the accrual period (the numerator) and how many days are treated as a full year (the denominator). The four you are most likely to meet are 30/360, Actual/360, Actual/365 Fixed, and Actual/Actual, and the one written into your contract directly changes how much interest you pay or receive. On the same principal and the same stated rate, swapping one convention for another can shift annual interest by hundreds or thousands of dollars.
How the Day Count Fraction Fits Into Interest
Every interest calculation uses three inputs: the principal (your outstanding loan balance or a bond’s face value), the stated annual rate, and the day count fraction that scales that annual rate down to the period you actually care about.
The day count fraction is where the conventions split apart. Its numerator counts days in the accrual period. Its denominator stands in for the length of a year. Different conventions define each differently, so the same loan at the same stated rate produces different dollar amounts depending on which rule applies. The sections below walk through the four main conventions and the real cost differences they create.
30/360
The 30/360 convention treats every month as 30 days and every year as 360 days. That fiction smooths out the irregularities of 28, 29, and 31-day months and makes every semiannual coupon identical in size. It is the standard day count for U.S. corporate bonds, municipal bonds, and agency bonds.1Nasdaq. Thirty/Three Sixty (30/360) Definition
The convention includes end-of-month adjustment rules. A start date on the 31st is changed to the 30th. If the end date is the 31st and the start date is the 30th or 31st, the end date also becomes the 30th. February’s last day gets similar treatment when it appears as a start date, and when both dates fall at month-end in February. The point of these adjustments is a clean, uniform coupon, which is why bond markets prefer the method for long-term fixed-income securities.
The European Variant: 30E/360
Outside the United States you will often see 30E/360. The difference is simpler end-of-month handling: any date on the 31st is always moved to the 30th, regardless of what the other date is, and the last day of February is always treated as the 30th.2ISO 20022. MT565: (16) Field 22F: Indicator: Method of Interest Computation Indicator The dollar difference between the two versions is small on most bonds, but it can surface in cross-border transactions where a European counterparty assumes 30E/360 and a U.S. counterparty assumes 30/360. If the contract does not specify which version applies, that ambiguity is a dispute waiting to happen.
Actual/360
Actual/360 counts the real calendar days in the accrual period but divides by a 360-day year. It is the dominant method in the U.S. money market. Commercial loans, commercial paper, and the Secured Overnight Financing Rate (SOFR) all use it.3Federal Reserve Bank of New York. An Updated User’s Guide to SOFR Treasury bill discount rates are calculated on a 360-day basis as well.4TreasuryDirect. Understanding Pricing and Interest Rates Fannie Mae multifamily loans also accrue interest on actual days over a 360-day year.5Fannie Mae Multifamily Guide. Fannie Mae Multifamily Guide – Actual/360 Interest Calculation Method
Why Actual/360 Costs Borrowers More
The math tilts toward the lender. Dividing the annual rate by 360 produces a larger daily rate than dividing by 365, but you still owe interest for every actual calendar day, and there are 365 of those (366 in a leap year). You end up paying interest for roughly five extra days each year. A stated 5% rate under Actual/360 works out to about 5.07% on a true annual basis, because 5% multiplied by 365/360 is approximately 5.069%.
On a $500,000 commercial loan at 6%, Actual/360 generates about $417 more in annual interest than a straight 6% calculation on a 365-day year. On a $5 million credit facility you are looking at more than $4,000 a year in extra interest purely from the day count convention. The convention is often buried in the fine print of a term sheet while the headline rate takes all the attention, so this is worth checking before you sign.
Actual/365 Fixed
Actual/365 Fixed counts the real calendar days in the accrual period and always divides by 365, even in a leap year. On February 29 the numerator picks up an extra day but the denominator stays at 365, so you accrue slightly more than a full year’s interest over 366 days.6Association of Corporate Treasurers. ACT Wiki – ACT/365 fixed
The convention is most common in the British pound sterling short-term market and across several Commonwealth nations. In the United States, you encounter it mainly in consumer lending. Credit card issuers typically calculate the daily periodic rate by dividing the APR by 365.7Consumer Financial Protection Bureau. What Is a Daily Periodic Rate on a Credit Card? That daily rate is then multiplied by the outstanding balance each day, which is why carrying a credit card balance in a 31-day month costs more than in a 30-day month even though the denominator does not change.
Actual/Actual
Actual/Actual is the most calendar-faithful method. Both numerator and denominator reflect reality: the actual days in the accrual period divided by the actual days in the year (365 or 366). This is the standard for U.S. Treasury bonds and notes, where yields use actual day counts on a 365- or 366-day year basis.8U.S. Department of the Treasury. Interest Rates – Frequently Asked Questions
When an accrual period crosses the boundary between a leap year and a non-leap year, the calculation splits. The portion of days in the 366-day year uses 366 as its denominator, and the portion in the 365-day year uses 365. The split keeps the accrual proportional to the calendar and prevents either side from getting a windfall at year-end.
Not every Actual/Actual implementation is the same. ISDA, ICMA, and AFB each publish their own version, differing mainly in how the denominator is identified. Those distinctions rarely move the number on a plain fixed-rate bond, but they matter in structured products and cross-border derivatives, where counterparties need to agree on a single calculation standard.
Comparing the Conventions on the Same Loan
The easiest way to see the difference is to run the same loan through each rule. Take a $500,000 loan at 6% interest and calculate the interest owed for January, which has 31 actual days.
- 30/360: $500,000 × 6% × (30/360) = $2,500.00. January is treated as 30 days.
- Actual/365: $500,000 × 6% × (31/365) = $2,547.95. The full 31 days count, divided by 365.
- Actual/360: $500,000 × 6% × (31/360) = $2,583.33. The full 31 days count, but dividing by 360 makes each day more expensive.
That $83 monthly gap between 30/360 and Actual/360 compounds. Over a 25-year loan term on $1 million at 5%, the total interest difference between the two can exceed $8,000. The percentage looks modest, but on commercial real estate loans where seven-figure balances are routine, the dollars matter. When comparing loan offers, check the convention before you compare the rates.
When Actual/360 Runs Into Usury Caps
Because Actual/360 pushes the effective rate above the stated rate, it can collide with state usury caps. A nominal 6% under Actual/360 works out to roughly 6.08% on a true annual basis, and that gap has been the basis for legal challenges. Courts in some states have found that loans priced at the maximum allowable rate became usurious once the Actual/360 calculation was applied, because the effective rate exceeded the statutory ceiling. Other states have upheld the practice, particularly for short-term commercial loans where the convention is established industry custom.
If your loan uses Actual/360 and your state caps interest, verify that the effective rate, not just the stated rate, falls under the limit. For lenders, the risk is that a court could void the interest provision or impose penalties for exceeding the cap, even if the overage was unintentional.
Business Day Adjustments Can Shift the Accrual Period
Day count conventions set how much interest accrues. Business day conventions set when payments actually land. If a scheduled payment date falls on a weekend or holiday, the contract specifies a rule for moving it to a valid business day, and that shift can change the length of the accrual period.
The most common rule is the Modified Following Business Day Convention. A payment due on a non-business day rolls forward to the next business day, unless that next business day falls in a different calendar month, in which case it rolls backward to the preceding business day instead.9U.S. Securities and Exchange Commission. Terms and Conditions of the Notes The rule keeps a payment from accidentally crossing a month-end boundary and distorting the accrual. Simpler Following and Preceding versions always move in one direction. ISDA’s standard definitions for swap contracts default to Modified Following for most payment and period end dates.10International Swaps and Derivatives Association. ISDA US Guidance for Rates For most borrowers, the practical point is that a holiday near a payment date can add or subtract a day or two from the interest period and slightly change the amount owed.
How to Find Out Which Convention Applies to You
The day count convention is almost always stated in the loan agreement, bond indenture, or swap confirmation, though not usually on the first page. In commercial loan documents, look in the section defining “interest” or “interest period.” Bond indentures place it alongside the coupon payment schedule. ISDA swap confirmations include it as a named field.
If you are a consumer borrower, the convention is less likely to be labeled in plain terms. Credit card agreements reference the daily periodic rate and state whether the APR is divided by 360 or 365.7Consumer Financial Protection Bureau. What Is a Daily Periodic Rate on a Credit Card? Mortgage disclosures focus on APR and finance charge rather than naming the convention. When in doubt, ask the lender which convention they use, then run the math. The formula is simple enough that a spreadsheet can confirm whether your payment matches the stated terms.