Day-Count Conventions and Settlement Cycles

Using the wrong day-count convention on a $100,000 corporate bond position creates $200-500 in calculation errors—small individually, material when reconciling a portfolio. The practical antidote isn't memorizing every convention variant. It's knowing that Treasuries count actual days while corporates and municipals assume 30-day months—and verifying which applies before every trade.

Why Day-Count Conventions Matter (The Accrued Interest Problem)

When you buy a bond between coupon dates, you owe the seller accrued interest—compensation for the days they held the bond during the current coupon period. The calculation seems straightforward: multiply the daily interest rate by the number of days elapsed.

The problem: different bonds count "days" differently.

A corporate bond bought on March 1 (60 days after January payment) might calculate accrued interest as 60/360 = 16.67% of the semi-annual coupon. A Treasury bond with identical coupon dates calculates it as 59/365 = 16.16% (because January has 31 days, not 30). On a 5% coupon, $10,000 position, that difference is $2.55—enough to cause settlement disputes and reconciliation headaches across a diversified fixed income portfolio.

The point is: day-count conventions aren't academic trivia. They determine the exact dollar amount that changes hands at settlement.

30/360 Convention (Why Corporates and Municipals Use It)

The 30/360 convention assumes every month has 30 days and every year has 360 days. This simplification dates to the pre-computer era when traders needed mental math shortcuts—a choice that persists today across corporate and municipal bond markets (Fabozzi and Mann, 2021).

The calculation: Accrued Interest = Par Value x (Annual Coupon Rate / 360) x Days Elapsed

Where "Days Elapsed" uses the 30/360 rule:

• Each full month = 30 days (regardless of actual calendar days)
• Partial months count actual days, capped at 30
• If the start date is the 31st, change it to 30
• If the end date is the 31st and the start date is 30 or 31, change the end date to 30

Example: Corporate Bond Accrued Interest

Your situation: You're buying a 5% coupon, $10,000 par corporate bond that pays semi-annually on February 1 and August 1. Trade settles March 15.

Step 1: Count days from last coupon (February 1) to settlement (March 15)

• February: 30 days (under 30/360, even though February actually has 28)
• March 1-15: 14 days (since we're counting up to but not including settlement in some conventions)
• Total: 44 days (or 43 depending on convention—verify with your broker)

Step 2: Calculate accrued interest

• Semi-annual coupon = $10,000 x 5% / 2 = $250
• Daily rate = $250 / 180 days = $1.389
• Accrued interest = 44 days x $1.389 = $61.11

What you pay at settlement:

• Clean price (quoted): $10,150.00 (if trading at 101.5)
• Accrued interest: $61.11
• Dirty price (your payment): $10,211.11

The durable lesson: 30/360 makes February 30 days long. This artificial simplification means corporate bond accrued interest calculations differ from Treasury calculations even when coupon dates align.

Actual/Actual Convention (Why Treasuries Use It)

U.S. Treasury securities use the Actual/Actual convention—counting the actual calendar days elapsed and the actual days in the coupon period.

The calculation: Accrued Interest = Par Value x (Annual Coupon Rate / 2) x (Actual Days Elapsed / Actual Days in Period)

Example: Treasury Note Accrued Interest

Your situation: You're buying a 4% coupon, $10,000 par Treasury note that pays semi-annually on January 15 and July 15. Trade settles March 15.

Step 1: Count actual days from last coupon to settlement

• January 16-31: 16 days
• February 1-28: 28 days (2025 is not a leap year)
• March 1-15: 15 days
• Total: 59 actual days

Step 2: Count actual days in the full coupon period (Jan 15 to July 15)

• January 16-31: 16 days
• February: 28 days
• March: 31 days
• April: 30 days
• May: 31 days
• June: 30 days
• July 1-15: 15 days
• Total: 181 days (in this period)

Step 3: Calculate accrued interest

• Semi-annual coupon = $10,000 x 4% / 2 = $200
• Accrued fraction = 59 / 181 = 0.3260
• Accrued interest = $200 x 0.3260 = $65.19

Why this matters: The same March 15 settlement would produce different accrued interest under 30/360: 60 days / 180 = 0.3333 x $200 = $66.67. That's a $1.48 difference per $10,000 position—or $148 per million in face value.

Convention Mismatch Errors (The $500 Problem)

The most expensive mistakes happen when investors apply the wrong convention to the wrong bond type.

Common error pattern:

1. You calculate Treasury accrued interest using 30/360 (wrong)
2. Broker calculates using Actual/Actual (correct)
3. Settlement amount differs from your expectation
4. You dispute the trade or accept incorrect reconciliation

Dollar impact by position size:

The practical point: For portfolios above $100,000, convention errors compound into material dollars. Always confirm which convention applies before calculating expected settlement amounts.

Convention quick reference:

Settlement Cycles (T+1 Changes Everything)

Since May 28, 2024, most U.S. securities settle on T+1 (trade date plus one business day). This replaced the previous T+2 cycle and has direct implications for accrued interest.

What settles T+1:

• Equities
• Corporate bonds
• Municipal bonds
• ETFs
• Agency securities

Why settlement timing matters for accrued interest:

If you trade on Friday, settlement occurs Monday (the next business day). Your accrued interest calculation must run to Monday, not Friday. Three extra calendar days (Saturday, Sunday, Monday vs. Friday) can mean an extra $4-8 per $10,000 in accrued interest on a 5% coupon bond.

Example: Weekend Settlement Impact

• Trade date: Friday, March 14
• Settlement date: Monday, March 17 (T+1 business day)
• Days of extra accrued vs. same-day settlement: 3 calendar days
• Extra accrued on 5% coupon, $10,000 par: 3 x ($500/360) = $4.17

The test: Before any bond trade, ask yourself—what is my actual settlement date, and am I calculating accrued interest to that date (not trade date)?

Worked Example: Corporate vs. Treasury Comparison

To crystallize the convention difference, here's a side-by-side calculation for identical economics.

Both bonds:

• Par value: $10,000
• Coupon rate: 5% (semi-annual)
• Last coupon: January 1
• Settlement: March 15 (same year)
• Quoted price: 100 (at par)

Corporate Bond (30/360):

• Days elapsed: 30 (Jan) + 30 (Feb) + 14 (Mar 1-14) = 74 days
• Accrued = $10,000 x 0.05 / 360 x 74 = $102.78
• Dirty price: $10,000 + $102.78 = $10,102.78

Treasury Note (Actual/Actual):

• Days elapsed: 31 (Jan) + 28 (Feb) + 14 (Mar) = 73 days
• Days in period (Jan 1 to July 1): 181 days
• Accrued = ($10,000 x 0.05 / 2) x (73/181) = $100.83
• Dirty price: $10,000 + $100.83 = $10,100.83

Difference: $1.95 per $10,000—or $195 per million in face value.

Why the difference? February has 28 actual days but 30 days under 30/360. The corporate convention adds 2 phantom days of interest.

Detection Signals (How You Know Convention Errors Are Affecting You)

You're likely making convention errors if:

• Your calculated settlement amount differs from broker confirmation by $1-10 per $10,000
• You use the same formula for Treasuries and corporates (they require different calculations)
• You calculate accrued to trade date instead of settlement date
• Your year-end accrued interest reconciliation shows unexplained variances
• You use 365 days for corporates or 360 days for Treasuries

The practical antidote: Build a simple spreadsheet with separate tabs for 30/360 and Actual/Actual calculations, and use the appropriate tab based on security type.

Implementation Checklist (Tiered by ROI)

Essential (prevents 80% of errors)

These 4 items prevent most calculation mistakes:

1. Identify security type before calculating—Treasury = Actual/Actual; Corporate/Muni = 30/360
2. Calculate to settlement date, not trade date—add business days for T+1
3. Verify coupon dates from prospectus—don't assume January 1 / July 1
4. Compare your calculation to broker confirmation—differences signal convention mismatch

High-impact (for active traders)

For investors trading bonds frequently:

1. Build convention-specific calculator spreadsheet with dropdown for security type
2. Track settlement across weekends and holidays—extra days add accrued interest
3. Document each bond's convention at purchase—reference for future trades

Optional (for portfolio managers)

If you manage diversified fixed income portfolios:

1. Aggregate accrued interest by convention type for monthly reconciliation
2. Flag cross-convention trades (selling Treasury, buying corporate) for settlement timing
3. Automate day-count selection in portfolio management system

Next Step (Put This Into Practice)

Pick one corporate bond and one Treasury security from your portfolio (or watchlist). Calculate accrued interest for both using today's date as settlement.

How to do it:

1. Find last coupon date and next coupon date from bond details
2. Apply 30/360 for the corporate: count months as 30 days
3. Apply Actual/Actual for the Treasury: count actual calendar days
4. Compare to your broker's accrued interest quote

Interpretation:

• Match within $0.10 per $10,000: Your convention understanding is correct
• Off by $1-5 per $10,000: You likely applied the wrong convention
• Off by more than $5 per $10,000: Check coupon dates or settlement date assumptions

Action: If your calculation doesn't match the broker's quoted accrued interest, call and ask which day-count convention they're using. Document it for future trades in that security.

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References:

Fabozzi, F.J. and Mann, S.V. 2021. The Handbook of Fixed Income Securities, 9th Edition. McGraw-Hill Education.

ISDA. 2006. 2006 ISDA Definitions, Section 4.16. International Swaps and Derivatives Association.

Securities and Exchange Commission. 2024. SEC Rule 15c6-1 Amendment: Shortening the Securities Transaction Settlement Cycle. Effective May 28, 2024.

SIFMA. 2024. Shortening the Settlement Cycle: T+1 Implementation Resources. Securities Industry and Financial Markets Association.

DTCC. 2024. T+1 Conversion Document. Depository Trust & Clearing Corporation.