The importance of understanding and clarifying day count basis in loans and investments
The interest calculation method is the approach used to determine the interest on a loan or investment over a specific period. There are different interest calculation methods that establish how interest should be computed based on various criteria.
Each interest calculation method affects how interest accumulates over time and can have implications for the overall interest outcome. The choice of interest calculation method often depends on the agreement between parties and the local standards or regulations governing the financial transaction. It is essential to understand and clarify the interest calculation method used when managing loans or investments.
In Nordkap, you can choose from the following:
- 30/360
- 30A/360
- 30U/360
- 30E/360 ISDA
- 30/360 SBAB
- Act/365
- Act/360
- 365/360
- Act/Act
Below is a more detailed explanation of the methods and how they are calculated.
30/360
How 30/360 works:
- Number of days in the month:
Each month is considered to have 30 days, regardless of the actual number of days in the month. For example, both January and February are considered to have 30 days under the 30/360 method. - Number of days in the year:
The year is considered to have 360 days. This simplifies interest calculation over a yearly period and facilitates comparisons between interest rates. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1 under the 30/360 method, the interest for the period would be (5% * 180 days) / 360 days = 2.5%.
30A/360
How 30A/360 works:
- Number of days in the month:
Unlike the 30/360 method, 30A/360 recognizes the actual number of days in each month. For example, if interest is calculated for January, which has 31 days, the actual monthly days will be used. - Number of days in the year:
The year is still considered to have 360 days. This means that each month, including February, is considered to have 30 days. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1 under the 30A/360 method, the interest for the period would be (5% * 180 days) / 360 days = 2.5%.
30U/360
How 30U/360 works:
- Number of days in the month:
Each month is considered to have 30 days, regardless of the actual number of days in the month. This includes February, which is considered to have 30 days, even though the actual number of days varies between 28 and 29. - Number of days in the year:
The year is considered to have 360 days, making it easier to calculate interest over the year and compare different interest rates. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1 under the 30U/360 method, the interest for the period would be (5% * 180 days) / 360 days = 2.5%.
30E/360 ISDA
How 30E/360 ISDA works:
- Number of days in the month:
Each month is considered to have 30 days, regardless of the actual number of days in the month. This includes February, considered to have 30 days. - Number of days in the year:
The year is considered to have 360 days, making it easier to calculate interest over the year and compare different interest rates. - Specifications for month length:
If the month has exactly 30 days, the actual monthly days are used. If the month has more than 30 days, 30 days are always used. For example, if interest is calculated for February (regardless of whether it is a leap year with 29 days or a non-leap year with 28 days), it is considered to have 30 days. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1 under the 30E/360 ISDA method, the interest for the period would be (5% * 180 days) / 360 days = 2.5%.
30/360 SBAB
How 30/360 SBAB works:
- Number of days in the month:
Each month is considered to have 30 days, regardless of the actual number of days in the month. This includes February, considered to have 30 days. - Number of days in the year:
The year is considered to have 360 days, making it easier to calculate interest over the year and compare different interest rates. - Specifications for month length:
If the month has exactly 30 days, the actual monthly days are used. If the month has more than 30 days, 30 days are always used. - Specifications for February:
February is always considered to have 30 days, regardless of whether it is a leap year with 29 days or a non-leap year with 28 days. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1 under the 30/360 SBAB method, the interest for the period would be (5% * 180 days) / 360 days = 2.5%.
Act/365
How Act/365 works:
- Number of days in the month:
Each month is considered to have the actual number of days. For example, February is considered to have 28 or 29 days depending on whether it is a leap year. - Number of days in the year:
The year is considered to have the actual number of days. This means that a non-leap year is considered to have 365 days, and a leap year is considered to have 366 days. - Interest calculation:
Interest is calculated by taking the actual number of days between two dates and dividing it by the total number of days in the year. This is then multiplied by the annual interest rate. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1, the interest for the period would be calculated by taking the actual number of days between these dates and dividing it by the total number of days in the year.
Act/360
How Act/360 works:
- Number of days in the month:
Each month is considered to have the actual number of days. For example, February is considered to have 28 or 29 days depending on whether it is a leap year. - Number of days in the year:
The year is considered to have 360 days. Regardless of whether it is a leap year or not, 360 days are always used. - Interest calculation:
Interest is calculated by taking the actual number of days between two dates and dividing it by the total number of days in the year (360 days). This is then multiplied by the annual interest rate. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1, the interest for the period would be calculated by taking the actual number of days between these dates and dividing it by 360.
365/360
How 365/360 works:
- Number of days in the month:
Each month is considered to have 30 days. Regardless of the actual number of days in each month, 30 days are used as the standard. - Number of days in the year:
The year is considered to have 360 days. Regardless of whether it is a leap year or not, 360 days are always used. - Interest calculation:
Interest is calculated by taking the actual number of days between two dates and dividing it by 360. This is then multiplied by the annual interest rate. - Example of Interest Payment:
If you have an interest rate of 5% and a loan period from January 1 to July 1, the interest for the period would be calculated by taking the actual number of days between these dates and dividing it by 360.
Act/Act
How Act/Act works:
- Number of days in the interest period:
For each interest period, the actual number of days between two interest payments or between issue and maturity is counted. - Number of days in the year:
The actual number of days in a year is counted. This can vary from year to year, especially due to leap years. - Interest rate:
The specified interest rate is converted into a daily interest rate by dividing the annual interest rate by the number of days in the year. - Interest calculation:
The interest for each period is calculated by multiplying the daily interest rate by the actual number of days in the interest period.