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      Question

       In India, day count convention for Money Market is

      different from day count convention for Bond Market. The day count convention for Money market is ___
      A 30/360 Correct Answer Incorrect Answer
      B actual/360 Correct Answer Incorrect Answer
      C 30/365 Correct Answer Incorrect Answer
      D actual/365 Correct Answer Incorrect Answer
      E actual/actual Correct Answer Incorrect Answer

      Solution

      Day count convention refers to the method used for arriving at the holding period (number of days) of a bond to calculate the accrued interest. As the use of different day count conventions can result in different accrued interest amounts, it is appropriate that all the participants in the market follow a uniform day count convention. For example, the conventions followed in Indian market are given below. Bond market: The day count convention followed is 30/360, which means that irrespective of the actual number of days in a month, the number of days in a month is taken as 30 and the number of days in a year is taken as 360. Money market: The day count convention followed is actual/365, which means that the actual number of days in a month is taken for number of days (numerator) whereas the number of days in a year is taken as 365 days. Hence, in the case of T-Bills, which are essentially money market instruments, money market convention is followed.

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