Day-Count Convention

Divorced parents who have shared custody of children are painfully aware of how carving up the calendar for visitation time can affect a monthly petty cash budget. Time with the kids often results in greater expenditures for food and entertainment, while time away can result in some day to day savings. Google "Disneyland Daddy" for details.

One of the fundamental differences between calculating the prices between stocks and bonds is the factoring of accrued interest. If, for example, a bond pays a total 4% coupon twice a year, then 2% is paid every 6 months. Let's say it's paid in June and in December. If the owner sells the stock in September, he or she deserves roughly 1% accrued interest or gains, since there was 3 months of ownership before selling. The buyer needs to acknowledge that he or she is not entitled to those past 3 months’ income; only the next 3 months belong to the buyer, post purchase, and continuing until maturity or sale.

The Day-Count Convention is the calculation of accrued interest as per the bond in question. The calculation is different for each bond, since payment dates, frequency, and other factors are unique depending on the terms of its underwriting.

Big idea: Read the fine print.