Day count convention
Principles of Finance glossary · Principles Of Finance
Definition
A rule for calculating the fraction of a year between two dates, used in accrued interest and swap calculations.
Day count convention in plain English
When money earns interest "over time," you first have to agree on how much time actually passed between two dates — and, weirdly, there's more than one accepted way to count. A day count convention is just the agreed rulebook for turning a gap between dates into a fraction of a year. Some rules pretend every month has 30 days and every year has 360; others count the real calendar days out of 365. It sounds nitpicky, but on huge sums even a tiny difference in "what fraction of a year is this?" changes the interest owed, so both sides must use the same rule to avoid arguments.
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