Question

Explain why and when calculating securities (annualization) do you use 360 days and 365 days?

Answer 1

Security annualisation is an annual rate of return which is derived from any security or commodity. Generally annualisation factor is used is a multiplication factor that converts any base rate into annual rate for an easy comparision with other security or commodity.

When and where 360 days are used for calculation of security annualisation?

360 days are used for the calculation of below:

- Bank discount yield : Treasury bills are quoted by discounting the bound using 360 days convention method which states there are 30 days in each 12 months .

- Money market yield : Money market instruments are of short term duration and are often classified as cash equivalents. Thus they are quoted on a 360 day basis , thus 360 days calculation is used for money market instruments

365 days are used for the calculation of below :

- Effective annual yield : It gives accurate annual yield picture and takes the base of 365 days for calculation. It calculates the interest earned on interest , thus it considers the compounding effect and helps giving better picture.