Calculating Deposit Interest Across Settlement and Business-Day Adjustments

Summary

The document explains an ACT/365 deposit-interest calculation when settlement timing and a business-day convention affect the maturity date. In the example, a deposit is quoted for seven days, but T+2 settlement falls on a weekend, so the answer treats the start and adjusted end dates as April 1 and April 12, 2021. The elapsed calendar time is 11 days, which is used in the simple-interest calculation on the principal at the stated rate.

The result illustrates why the quoted tenor need not equal the number of accrual days when settlement and calendar adjustments apply. The answer assumes the question refers to 2021 rather than 2011 and clarifies that April 12 was not a holiday in that year. The example therefore depends on the year and holiday calendar; it does not establish a universal rule for every deposit or explain alternative conventions in detail.

Key ideas

• Settlement lag and business-day adjustments can change the dates used to calculate accrued interest.
• The example uses the calendar-day difference between April 1 and April 12 as the accrual period.
• The calculation applies simple interest using an ACT/365 day-count basis.
• The answer depends on interpreting the dates as 2021 and on the stated holiday calendar.

Tags

# ACT/360 and business day convention interest question


# ACT/360 and business day convention interest question












The question I've been stuck is: We have a deposit of 10 million on 2011-04-01 for 7 days at 4 percent, assume T+2 settlement, calculated with ACT/365 basis and following business day convention. (04-09, 04-10, 04-11, and 04-12 holiday) What's the interest amount we receive at maturity?

The given answer is \$12,054.8, but I checked repeatedly, but I don't understand how to get to $12,054.8. I assumed the answer is calculated by:

$$10,000,000 \times 0.04 \times 11/365=12,054.8$$

I don't get why it's 11 days out of 365.

## Answer by C8H10N4O2 (score 0, accepted)

https://quant.stackexchange.com/a/63551

Do you mean 2011-04-01 from a decade ago or the recent 2021-04-01?

Assuming we mean the recent date: start = Thursday 2021-04-01 end = Monday 2021-04-12 (because T+2 lands on the weekend) difference = 11 days 11 days x 0.04 / 365 days * $10,000,000 = $12,054.80. Monday 2021-04-12 is not a holiday.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.