How a 1/1 Day Count Fraction Represents an Absolute Rate

Summary

The document explains the 1/1 day count fraction as a way to express an absolute interest amount rather than interest that accrues in proportion to elapsed time. In its example, a loan of $100 at a 5% rate produces $5 of interest for the period, whatever its duration. The fraction therefore functions as a formula convention that can fit into calculation methods used for other day count conventions.

The answer is deliberately narrow: it gives one illustration but does not discuss how the convention is applied across specific instruments or payment schedules. It also reports that the respondent, despite experience with linear rates, had not seen the convention on term sheets or in standard product pricing. That observation is anecdotal, not evidence of how commonly the convention is used throughout the market. The document supplies a practical interpretation, but not a full treatment of contractual or pricing details.

Key ideas

• A 1/1 day count fraction can represent an absolute interest amount.
• In the example, interest is $5 on a $100 loan at 5%, regardless of the period’s duration.
• The convention can be represented within formulas used for other day count methods.
• The answer offers a single example and no instrument specific implementation details.
• The respondent’s experience suggests limited use in the term sheets and pricing they encountered, but this is anecdotal.

Tags

# Day Count Fraction specified as 1/1 (2006 ISDA section 4.16 a)


# Day Count Fraction specified as 1/1 (2006 ISDA section 4.16 a)












I have a hard time understanding the day count fraction specified as 1/1.

I have never seen an example in which this is used and I have not been able to find any detailed explanation of how it is used.

Can anyone explain when and how it is used? How does it apply to any period? To what type of period does it apply (year, month, week, day)?

I will be most obliged if I could receive an answer on this. Kind regards, Mark Lipse

## Answer by Attack68 (score 1)

https://quant.stackexchange.com/a/40286

This is just a formulaic way of representing an absolute interest level, to be consistent with other calculation methods and formulae.

A lends \$100 to B at 5% with a 1/1 DCF. Then whatever the time period the interest payment is \$5.

I've worked in linear rates for >10Y and never seen it on any term sheet docs or in standard product pricing.

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