MaxMark—Viney
MenuItem8:(Topic 8)
Mathematics of finance: An Introduction to basic concepts and calculations
Question 1: Some aspects of financial calculations are based on market conventions. For the
purpose of simple interest calculations in the Australian market, what is the convention concerning
the number of days in a year?
A: 360 days per year
B: 365.25 days per year
C*: 365 days per year
D: 365 days per year, except for leap years, when it is 366
.
Feedback: The convention in the Australian market is to assume that there are 365 days in a year. If
the period of an investment in a leap year includes 29 February, the 29th day is counted but the year
is still assumed to have 365 days.
MORE:
Financial Institutions, Instruments and Markets
4/e
5/e
,
Section 8.2.1,
p.
327
275
.
In this example the amount was borrowed for 90 days, which must be converted into a fraction of a
year in order to apply Equation (8.1). It is important to note that the market convention relating to
the number of days in the year varies between countries; for example, in the United Kingdom,
Australia and many other countries the convention is that a pa rate relates to a 365-day year.
Though this practice is common, it is not universal. In the USA and in the euromarkets, the
convention is to use a 360-day year. In this text the 365-day convention is used.
In Example 3 the amount was borrowed for ninety days, which must be converted into
a fraction of a year in order to apply Equation 8.1. It is important to note that the
market
convention
relating to the number of days in the year varies between countries. In the
United Kingdom, Australia and a number of other countries the convention is that a per
annum
rate relates to a 365-day year. However, in the United States and in the euromarkets
the convention is to use a 360-day year.
In this chapter the 365-day convention
is used.
Question 2: Some aspects of financial calculations are based on market conventions. For the
purpose of simple interest calculations in the US and euromarkets, what is the convention
concerning the number of days in a year?
A*: 360 days per year
B: 365.25 days per year
C: 365 days per year
D: 365 days per year, except for leap years when it is 366
.
Feedback: In some markets, including the US and the euromarkets, it is conventional to assume that
there are 360 days in a year. This simplifies calculations for securities with terms to maturity of 90,
180 and 270 days.
MORE:
Financial Institutions, Instruments and Markets
4/e
5/e
,
Section 8.2.1,
p.
327
275
.
In this example the amount was borrowed for 90 days, which must be converted into a fraction of a
year in order to apply Equation (8.1). It is important to note that the market convention relating to
the number of days in the year varies between countries; for example, in the United Kingdom,
Australia and many other countries the convention is that a pa rate relates to a 365-day year.