Day count convention
Also written Day count basis
The rule for counting days in a holding period to calculate accrued interest. Indian bonds use 30/360; the Indian money market, including T-bills, uses actual/365.
In plain language
If you sell a bond halfway between two coupon dates, the buyer owes you the interest earned for the days you held it. But how many days was that?
It sounds like a question with one answer. It is not. February has 28 days, some months have 31, and a year can have 365 or 366 days. Different markets settle the question differently, and the chosen rule is called the day count convention.
The workbook's point is that because different conventions give different accrued interest, everyone in a market should follow the same convention — and in India, bonds and the money market follow different ones.
How it works
Box 4.3 of the workbook.
| Convention | Days in month | Days in year | Where used |
|---|---|---|---|
| 30/360 | Always 30 | 360 | Indian bond market |
| Actual/365 | Actual days | 365 | Indian money market, including T-bills |
| Actual/actual, actual/360, 30/actual | Varies | Varies | Other countries |
The workbook notes the convention differs between countries and between markets within the same country — its example is India's money market versus its bond market.
The Excel "Basis" argument. Chapter 4's PRICE, YIELD and DURATION illustrations take a Basis input:
- 0 or omitted = US (NASD) 30/360 (labelled "US (NASD) & INDIA 30/360" in Illustrations 4.2 and 4.4)
- 1 = Actual/actual
- 2 = Actual/360
- 3 = Actual/365
- 4 = European 30/360
All three illustrations use Basis 0, consistent with the Indian bond convention, together with Frequency 2 for semi-annual coupons.
The formula
Accrued interest = Face value × Coupon rate × (Days counted ÷ Days in year)
30/360: days counted assume 30-day months, year = 360. Actual/365: actual days, year = 365.
A worked example
The instrument and dates are illustrative; the conventions are the workbook's.
An investor sells ₹10,00,000 of a 7% instrument, with interest accruing from 1 January 2027 to 1 March 2027.
Under 30/360 (Indian bond convention). January and February each count as 30 days → 60 days. ₹10,00,000 × 7% × 60/360 = ₹11,666.67
Under actual/365 (Indian money market convention). January has 31 days, February 2027 has 28 → 59 days. ₹10,00,000 × 7% × 59/365 = ₹11,315.07
Difference: ₹351.60 on the same holding, for the same two months.
On a single ₹10 lakh trade that looks small. Across a portfolio manager's debt book, with hundreds of trades, it is exactly the kind of mismatch that produces reconciliation breaks — which is why the workbook says participants should follow a uniform convention within a market.
Why NISM asks about it
Chapter 4 (Investing in Fixed Income Securities), Box 4.3, and the Basis field in Illustrations 4.1, 4.2 and 4.4. A direct question is likely on which convention applies to Indian bonds (30/360) and which to T-bills and the money market (actual/365). The Excel Basis codes may appear as a match-the-following item.
Common exam traps
- 30/360 for Indian bonds; actual/365 for the Indian money market. Swapping them is the standard trap.
- T-bills are money market instruments, so they follow actual/365 even though they are government securities.
- The convention affects accrued interest, which is its stated purpose in the workbook.
- Basis 0 in Excel = 30/360; Basis 3 = actual/365.
- Workbook typo to ignore. Illustration 4.4 labels the DURATION result cell with "=YIELD(...)" although the function being illustrated is DURATION.
- Conventions differ across countries and across markets within a country — there is no single global rule.
Where this is taught
- Series XXI-B · Chapter 4: Investing in Fixed Income Securitiesintroduced here
- Series V-D · Chapter 18: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series X-A · Chapter 9: Investing in Fixed Income Securitiesintroduced here
- Series XXI-A · Chapter 4: Investing in Fixed Income Securitiesintroduced here
Related terms
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Accrued interestCoupon earned from the last coupon date up to settlement, paid by the buyer to the seller on top of the negotiated price, because the issuer will pay the whole coupon to whoever holds the bond next.
- Day count fractionThe agreed rule for turning a period into a fraction of a year — the numerator counts days in the period, the denominator days in the year — and it decides every accrual figure in the market.
- Fixed income securityA debt instrument under which the issuer promises a fixed coupon at regular intervals and repayment of the face value at maturity — government bonds, corporate bonds, debentures and T-bills.
- Money Market InstrumentsDebt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.
- Intrinsic value of a bondThe sum of the present values of all a bond's future cash flows, discounted at the investor's required rate of return. Buy if it exceeds the market price; sell if it is below.