Foundations
Curve Conventions and Day-Count
Day-count, compounding, and calendars connect abstract rates to real cash-flow accruals.
Mental model
Market conventions determine how quoted rates become actual accruals and cash flows.
Day-count conventions (e.g., ACT/360, ACT/365, 30/360) define how time fractions are computed between dates.
Compounding conventions (simple, annual, continuous) determine how quoted rates translate into discount factors.
Explore the mechanism
How can two identical quoted rates produce different cash flows when their conventions differ?
This graph compares year fractions for ACT/365, ACT/360 and 30/360 for the same number of calendar days, and shows the resulting discount factors under different compounding styles. Use the sliders to change tenor and rate and see how small convention choices move accrual and PV.
Day-count is a mapping from date pairs to year fractions. Compounding is a mapping from (rate, τ) to discount factor. Both are conventions, not laws of nature, but once fixed they must be applied consistently across products and curves.
For short tenors the numerical differences look small, but on large books they add up to material P&L and reconciliation noise. The practitioner’s rule: centralise convention logic in one place, never re-implement it per product, and always log the day-count and compounding assumptions used for a given curve or price.
What to notice
Calendars and business-day rules affect accrual periods, fixing dates, and payment dates in interest-rate products.
A robust pricing library centralises these conventions so all products and curves use consistent time calculations.
Where it appears
- interest-rate curve construction
- swap and bond accrual calculations
- cross-system valuation reconciliation
Where the intuition breaks
What this view leaves out
- Correct conventions prevent mechanical mismatches, but they do not resolve poor market inputs or an inappropriate interpolation method.
Where this concept sits
Follow the strongest prerequisites, applications, extensions, and contrasts.
Connections for Curve Conventions and Day-Count
Bootstrapped curves depend on the market's day-count, compounding and calendar conventions.
SupportsDiscounting and Present ValueDay-count and compounding conventions determine how quoted rates are converted into discount factors and present values.
Used byBlack-76 Pricing for Forwards and FuturesForward-option valuation depends on consistent time-to-expiry and rate conventions.
Bootstrapped curves depend on the market's day-count, compounding and calendar conventions.
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