Madhu Chandarasekaran, CFAWhy 30/360 Is Commonly Used for Corporate Bonds
The 30/360 method is widely used for
Why 30/360 Is Commonly Used for Corporate Bonds
The 30/360 method is widely used for corporate, agency, and municipal bonds due to its simplicity. It was originally devised to make manual interest calculations easier before modern computers. Since 360 is highly divisible (by 2, 3, 4, 6, 12), common coupon frequencies result in whole-number day counts (e.g. semiannual = 180 days, quarterly = 90 days).
Each coupon period is treated as the same length in calculations, avoiding complications from irregular month lengths. The consistency and ease of 30/360 make interest accruals quicker to compute and uniformly applied. Government bonds like U.S. Treasuries, by contrast, often use an Actual/Actual method to count exact days.
Formula for Accrued Interest (30/360)
When a bond is sold between coupon dates, the seller is entitled to the interest that has accrued from the last coupon payment up to the settlement date.
Step 1: Day Count Calculation
Determine the number of days between the last coupon date and the settlement date using the 30/360 assumption. One formula is:
Days30/360=360×(Y2−Y1)+30×(M2−M1)+(D2−D1)\text{Days}_{30/360} = 360 \times (Y_2 – Y_1) + 30 \times (M_2 – M_1) + (D_2 – D_1)Days30/360=360×(Y2−Y1)+30×(M2−M1)+(D2−D1)
Adjust end-of-month dates if necessary (e.g., treat the 31st as the 30th). This effectively counts each full month as 30 days.
For example, if the last coupon was on April 21 and settlement is on August 4, the 30/360 day count would be:
(8−4)×30+(4−21)=4×30−17=103 days(8 – 4) \times 30 + (4 – 21) = 4 \times 30 – 17 = 103 \text{ days}(8−4)×30+(4−21)=4×30−17=103 days
Step 2: Accrued Interest Formula
Accrued Interest=Coupon Payment per Period×Days since last coupon30/360Days in full coupon period30/360\text{Accrued Interest} = \text{Coupon Payment per Period} \times \frac{\text{Days since last coupon}_{30/360}}{\text{Days in full coupon period}_{30/360}}Accrued Interest=Coupon Payment per Period×Days in full coupon period30/360Days since last coupon30/360
For a semiannual bond, the denominator is 180 days. Alternatively, you can use:
Accrued Interest=Annual Coupon Amount×Days since last coupon30/360360\text{Accrued Interest} = \text{Annual Coupon Amount} \times \frac{\text{Days since last coupon}_{30/360}}{360}Accrued Interest=Annual Coupon Amount×360Days since last coupon30/360
Example: Step-by-Step Accrued Interest Calculation
Scenario:
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Bond face value: $1,000
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Annual coupon rate: 5% (paid semiannually)
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Last coupon date: June 1, 2025
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Settlement date: September 30, 2025
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Next coupon date: December 1, 2025
Step 1: Days Since Last Coupon
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June: 30 days
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July: 30 days
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August: 30 days
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September: 30 days
→ Total = 120 days
Step 2: Fraction of Coupon Period
A semiannual period = 180 days
→ Fraction = 120180=0.6667\frac{120}{180} = 0.6667180120=0.6667
Step 3: Calculate Accrued Interest
Semiannual coupon = 2.5% of $1,000 = $25
Accrued interest = $25 × 0.6667 = $16.67
Alternatively:
Annual coupon = $50
Daily interest (30/360 basis) = $50 / 360 = $0.1389
Accrued interest = $0.1389 × 120 = $16.67
Final Note:
The buyer pays $16.67 to the seller at settlement to compensate for the interest accrued from June 1 to September 30. On the next coupon date (December 1), the buyer receives the full $25 coupon, but part of it was effectively earned by the seller.