How should I calculate interest using basis 30/360, ACTUAL/360, ACTUAL/365 and ACTUAL/ACTUAL ? What is the difference between calculations ? Can you please give some examples ?

In finance, there are used multiple day count convention methods. In calculations, a day count convention determines how interest accrues over time for loans, bonds, mortgages, forwards, swaps etc. Each method is different, so it is preferred in case of specific situations (financial products).

Day count convention is presented in the format:

Number of days in the accrual period / Number of days in the year

30/360 method uses 30 days in every month and 360 days in a year. For example in case of 5% annual interest rate, divide it by 360 to get the daily interest rate (5 / 360 = 0.01389%). Then multiply daily interest rate by 30 to get the monthly interest rate: 0.01389 x 30 = 0.4167%.

ACTUAL/360 method uses the actual number of days in a month and 360 days in a year. For example in case of 5% annual interest rate, divide it by 360 to get the daily interest rate (5 / 360 = 0.01389%). Then multiply daily interest rate by the number of days in actual month, to get the monthly interest rate. Because August has 31 days, the calculation will be 0.01389 x 31 = 0.43059%.

ACTUAL/365 method uses the actual number of days in a month and 365 days in a year. For example in case of 5% annual interest rate, divide it by 365 to get the daily interest rate (5 / 365 = 0.01370%). Then multiply daily interest rate by the number of days in actual month, to get the monthly interest rate. Because August has 31 days, the calculation will be 0.01370 x 31 = 0.4247%.

ACTUAL/ACTUAL method uses the actual number of days in a month and actual number of days in a year, that is 365 days or 366 days in a leap year. For example in case of 5% annual interest rate in a leap year, the calculation of daily interest rate will be 5 / 366 = 0.01366%. Then the calculation of monthly interest rate for August will be 0.01366 x 31 = 0.42346%. For June, the monthly interest rate will be 0.01366 x 30 = 0.4098%.

Day count convention is presented in the format:

Number of days in the accrual period / Number of days in the year

30/360 method uses 30 days in every month and 360 days in a year. For example in case of 5% annual interest rate, divide it by 360 to get the daily interest rate (5 / 360 = 0.01389%). Then multiply daily interest rate by 30 to get the monthly interest rate: 0.01389 x 30 = 0.4167%.

ACTUAL/360 method uses the actual number of days in a month and 360 days in a year. For example in case of 5% annual interest rate, divide it by 360 to get the daily interest rate (5 / 360 = 0.01389%). Then multiply daily interest rate by the number of days in actual month, to get the monthly interest rate. Because August has 31 days, the calculation will be 0.01389 x 31 = 0.43059%.

ACTUAL/365 method uses the actual number of days in a month and 365 days in a year. For example in case of 5% annual interest rate, divide it by 365 to get the daily interest rate (5 / 365 = 0.01370%). Then multiply daily interest rate by the number of days in actual month, to get the monthly interest rate. Because August has 31 days, the calculation will be 0.01370 x 31 = 0.4247%.

ACTUAL/ACTUAL method uses the actual number of days in a month and actual number of days in a year, that is 365 days or 366 days in a leap year. For example in case of 5% annual interest rate in a leap year, the calculation of daily interest rate will be 5 / 366 = 0.01366%. Then the calculation of monthly interest rate for August will be 0.01366 x 31 = 0.42346%. For June, the monthly interest rate will be 0.01366 x 30 = 0.4098%.

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