The accrued interest on a bond is the amount of interest accumulated on a bond since the last coupon payment. The interest has been earned, but because coupons are only paid at set intervals the investor has not gained the money yet.
A day-count convention is a system used on debt securities, such as bonds to calculate the amount of accrued interest or the present value when the next coupon payment is less than a full coupon period away.
Among the most common conventions are 30/360, 30/365, actual/360, actual/365, and actual/actual.
- 30/360 – calculates the daily interest using a 360-day year and then multiplies that by 30 (standardized month).
- 30/365 – calculates the daily interest using a 365-day year and then multiplies that by 30 (standardized month).
- actual/360 – calculates the daily interest using a 360-day year and then multiplies that by the actual number of days in each time period.
- actual/365 – calculates the daily interest using a 365-day year and then multiplies that by the actual number of days in each time period.
- actual/actual – calculates the daily interest using the actual number of days in the year and then multiplies that by the actual number of days in each time period.
For Government bonds in India, we use the 30/360 European method.