What it means
Interest is calculated by multiplying the amount borrowed by the rate and by the fraction of a year that has passed. The fraction is days elapsed divided by days in the year, and day count conventions are the agreed ways to measure both numbers.
Without a convention, two parties could calculate different interest on the same loan. The most common conventions are written as two parts.
"Actual/360" counts the real number of days in the period and divides by 360, which is typical in money markets and many bank loans. "Actual/365" counts the real days and divides by 365, while "30/360" assumes every month has 30 days and every year has 360 days, a method often used for corporate bonds and mortgages.
Because 360 is smaller than 365, Actual/360 produces slightly more interest for the same stated rate. The difference seems small but becomes significant for large loans and long periods.
Borrowers who compare offers should ask for the day count, not just the rate. Day counts also affect bond pricing, where accrued interest between coupon dates is calculated using the bond's convention, and derivatives, where payments are based on rates and periods.
Loan agreements, treasury systems and spreadsheets all need to apply the stated convention exactly. Errors can cause underpayment, disputes and audit findings.
The nuance is that the quoted rate and the effective cost are different things. Two loans with the same headline rate but different conventions will cost different amounts, and a rate stated for a year does not describe the cost of a 90-day period unless you apply the right fraction.
Always check the day count clause in the loan agreement.
In practice
Real-world examples.
Example
A treasury manager compares two bank offers for a $5,000,000 overdraft facility, both with a stated rate of 5%. One quotes Actual/360 and the other Actual/365, so the first costs slightly more. She asks the first bank to adjust the rate to give the same effective cost.
Example
An investor buys a corporate bond between coupon dates. The seller is entitled to the interest accrued for the days they held it, calculated with the bond's 30/360 convention. The buyer pays this accrued interest on top of the quoted price.
Example
A property company reviews its loan agreement and discovers that interest is calculated on Actual/360, but its spreadsheet used 365. The company has been under-accruing interest expense by a small amount each month. The finance team corrects the model and adjusts the accounts.
Formula
Calculation
Interest = principal x annual rate x (days in period / days in year as set by the convention)
Suppose a company borrows $1,000,000 at 6% for 90 days. Under Actual/360, interest = 1,000,000 x 0.06 x 90 / 360 = $15,000. Under Actual/365, interest = 1,000,000 x 0.06 x 90 / 365 = $14,794.52. The difference is 15,000 - 14,794.52 = $205.48 on a single 90-day loan, which grows with larger amounts and repeated borrowing.Case study
Seen in the real world.
Thornbury Logistics is an illustrative, fictional haulage company that borrowed $12,000,000 to buy a fleet of trucks. The loan agreement quoted an interest rate of 5.5% with Actual/360 day count, but the treasury analyst built the forecast using 365 days.
At the first audit, the interest expense was found to be about $18,000 per year lower than the bank's invoices because the bank was charging an extra five days of interest compared with the model. The finance director reviewed all loans to check the conventions used.
The company corrected its spreadsheet templates and added the day count as a mandatory field in its loan register. In this illustrative story, the exercise also prompted the director to ask lenders for effective rates when comparing quotes.
Watch out
Common mistakes.
- Comparing loan rates without checking the day count convention, which can make one offer look cheaper than it is.
- Using a standard 365-day year in a spreadsheet when the contract specifies 360, leading to under-accrued interest.
- Forgetting leap years and month-end rules, which can change the number of days counted under some conventions.
Questions
People also ask.
What does Actual/360 mean?
It means interest is calculated using the actual number of days in the period divided by a 360-day year, which gives a slightly higher interest charge than a 365-day year.
Which day count do bonds use?
It depends on the type of bond and the market, with 30/360 common for corporate bonds and actual-day methods for many government securities, so check the terms.
Where do I find the day count for my loan?
It is stated in the loan or facility agreement, usually in the clause on interest calculation, and the bank can confirm it.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related