Learn to Count Your Days.
Prior to when teaching and a desire to expand my influence outside of Corporate America won the day, I worked as a commercial mortgage loan officer for the real estate arm of a global life insurance company. One of my favorite mortgage bankers and someone I’m proud to call a friend to this day is Peter Dailey. (In case you’re wondering, this isn’t his real name.) Speaking of days, let’s discuss day-count conventions.
Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):
The most common day-count conventions are 30/360, Actual/360, 30/365, Actual/365, and Actual/Actual. For each day-count convention, the last number or word represents the agreed-upon number of days in a given year, and the first number or word represents the assumed number of days in a given month. The day-count convention 30/360 is also known as the “banker’s year.”
The “banker’s year” assumes that there are 360 days in a year and 30 days in each month. The 30/360 day-count convention makes the math easy. Not all mortgage “bankers” are as good with math as Peter and need some help!
A mortgage loan is an example of a negotiated agreement, and the borrower and lender agree that for the purpose of calculating the simple daily interest rate, the assumption will be that there are 360 days in a year, and that for the purpose of calculating the simple accrued interest, it will be assumed that there are 30 days in each month.
In the inc shorthand for most mortgage loans, “c” would be 12 and the “n” would be 1. But this is really a 30/360 “banker’s year” day-count convention in disguise, since you could divide the simple annual interest rate by 360 (/360) and then multiply by 30 to ultimately get the true monthly interest rate: the “c” isn’t 360 because the loan document doesn’t call for daily compounding or 360 compounding periods within the time span of the simple interest rate.
Now let’s run the numbers using the inc shorthand “0.005, 1, 12.” If this were a mortgage loan that required monthly debt service payments with interest calculated and accrued based on a 30/360 day-count convention, you could back into the simple annual interest rate of 6% in an unconventional way using the day-count convention:
Illustrations by Scott Alberts. Copyright 2022 Brent Pritchard. All rights reserved.
You’ve been working with a “banker’s year” day-count convention all along, even if you didn’t realize it.
Today’s the day to learn more about day-count conventions, if you don’t have a handle on them already, because a finance professional who doesn’t know about day-count conventions is a finance professional whose days in the industry may be numbered.
Who is the first person to educate you on this topic of day-count conventions? (If not your finance instructor, then what’s up with that?!)
Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.