How Day-Count Conventions Apply to Yield Curves and Swap Cash Flows
Summary
The document asks whether a yield curve has a day-count convention of its own, given that rates are often displayed without one. It distinguishes the curve from the cash-flow conventions used in a swap: the floating leg's payment calculations require a specified day count, and changing that convention can change the calculated present value. At the same time, the instruments used to build a curve have their own market conventions, which inform the construction and interpretation of its rates.
The answer says conventions are implied and points readers to a market-conventions reference, while advising verification with the counterparty or data vendor when uncertain. The discussion does not spell out how individual curve instruments map into curve rates or give a specific currency's conventions. The practical takeaway is to treat day count as part of the market and instrument conventions behind a curve and to specify the floating-leg convention when pricing swaps, rather than assume a displayed curve label alone fully defines cash flows.
Key ideas
- Swap floating-leg cash flows require a specified day-count convention.
- Changing the floating-leg day count can affect a swap's present value.
- Yield-curve conventions may be implicit in the instruments and market used to construct the curve.
- Check applicable conventions with a counterparty or vendor when they are unclear.
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Full text
# daycount of the yield curve # daycount of the yield curve Complete characterization of an interest rate requires a few elements: - day count - compounding frequency - the rate itself - start date and end date That said, I notice that day counts are never displayed on yield curves found in textbooks or bloomberg. I would like to ask if there is a convention here widely used in the industry. This has practical applications. The pricing of a vanilla interest rate swap requires the matching of the present value of the fix leg and the floating leg. The floating leg has to be calculated from the yield curve. Typical swap contracts specify the daycount of the floating leg. Pricers in bloomberg calculate different PV for different specifications of the floating leg daycount which seems to imply that the yield curve used does not have a daycount associated with it and the floating leg daycount is needed to completely specify the float leg cash flows. Nevertheless, the yield curve is constructed using instruments with daycount conventions. So by extension, the rates presented on a yield curve should have a daycount associated with it. Can anyone explain what is going on here? daycount or no daycount? ## Answer by Magic is in the chain (score 1) https://quant.stackexchange.com/a/46292 Please read the Interest Rates Instruments and Market Conventions paper from OpenGamma (https://quant.opengamma.io/Interest-Rate-Instruments-and-Market-Conventions.pdf). The conventions are implied but it is also worth checking with the counter party/vendor when in doubt.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.