what is day count convention 
a day count convention is the system used on debt securities such as bonds or swaps to calculate the amount of accrued interest or the present value when the next coupon payment is less than a full coupon period away understanding day count conventionthe day count conventions apply to swaps mortgages and forward rate agreements as well as bonds many of the rules and definitions for applying the day count convention are set forth by the international swap dealers association which provides documentation for a wide range of financial transactions for example an agreed upon day count convention would be used to calculate the amount of accrued interest or the present value pv when the next coupon payment is less than a full coupon period away among the most common conventions are 30 360 30 365 actual 360 actual 365 and actual actual each bond market and financial instrument has its own day count convention which varies depending on the type of instrument whether the interest rate is fixed or floating and the country of issuance bonds and notes issued by the u s treasury earn interest calculated on an actual actual basis this means all days in a period carry equal value it also means the length of coupon periods and the resultant payments vary the interest on most money market deposits and floating rate notes is calculated on an actual 360 day basis the major exception is those denominated in the british pound for which interest is calculated on the actual 365 basis currencies that are or have been closely related to the british pound such as the australian new zealand and hong kong dollars also use 365 days the fixed rate leg of an interest rate swap and most fixed rate bonds use either the 30 360 day convention or 30 365 this convention stipulates the month will always be treated as having 30 days in it and the year will consistently be treated as having either 360 or 365 days swap markets using the 30 360 convention for the fixed rate of a swap include the u s dollar the euro and the swiss franc swaps in the british pound and the japanese yen usually use the 30 365 convention australia new zealand and hong kong again follow the united kingdom the floating rate leg of most interest rate swaps uses some variation of an actual day count versus either a 360 or 365 day year the markets that use 30 360 for the fixed rate leg which include the u s dollar markets use actual 360 for the floating rate leg those that use 30 365 on the fixed rate leg use actual 365 on the floating rate leg the london interbank offered rate libor is the most commonly used benchmark interest rate and is posted daily at 11 45 a m london time the intercontinental exchange the authority responsible for libor will stop publishing one week and two month usd libor after dec 31 2021 all other libor will be discontinued after june 30 2023 1 for most currencies interest at libor is calculated on the actual 360 day basis the major exception is again the british pound which is calculated on the actual 365 day basis 