Day Count Basis In the capital markets, there are a number of ways that days between dates are computed for interest rate calculations. Many of these conventions were developed before the wide spread introduction of computers. The historical rationale for many of these calculations was to simplify the math involved in performing normally complex financial calculations. And as in most industries with a long history, many of these conventions have stayed with us despite considerable advances in computers and computational methods.
The day count basis indicates the manner by which the days in a month and the days in a year are to be counted. The notation utilized to indicate the day count basis is (days in month)/(days in year).
For example, 30/360 assumes that each of the twelve months in a year consists of exactly 30 days. On the other hand, Actual/Actual considers the actual number of days in a month and the actual number of days in a year. Other types of day count basis are Actual/360, Actual/365, and 30/360 European. The 30/360 European day count basis differs from 30/360 basis in the algorithm used to handle the end of the month.
The five basic day count basis are the following: Actual/360 Actual/365 Actual/Actual 30/360 30/360 European
Duration The common objective behind the different definitions of duration is to measure the price sensitivity (and, therefore market risk) of a fixed-income security to changes in its yield. In general, one can distinguish between the following duration or duration-related concepts: Macaulay's duration Modified duration Dollar duration, dPdY, or "risk" Price value of an 01 Yield value of a 32nd
Macaulay's Duration If a bond is viewed as a series of cash flows, this concept measures sensitivity (in years) as the present value-weighted average of the cash flows of the bond. As such, it is a good measure for ranking different bonds as to their price sensitivity, and for constructing portfolios which will fully defease a future series of cash flows (see Immunization).
