Isolating the Effect of Day-Count Conventions on the Market Value of Interest Rate Swaps

12 Pages Posted: 1 May 2012 Last revised: 26 Dec 2012

See all articles by Geng Deng

Geng Deng

Wells Fargo

Tim Dulaney

Securities and Exchange Commission

Tim Husson

Securities and Exchange Commission

Craig J. McCann

Securities Litigation and Consulting Group

Date Written: May 1, 2012

Abstract

Day-count conventions are a ubiquitous but often overlooked aspect of interest-bearing investments. While many market traded securities have adopted fixed or standard conventions, over-the-counter agreements such as interest rate swaps can and do use a wide variety of conventions, and many investors may not be aware of the effects of this choice on their future cash flows. Here, we show that the choice of day-count convention can have a surprisingly large effect on the market value of swap agreements. We highlight the importance of matching day-count conventions on obligations and accompanying swap agreements, and demonstrate various factors which influence the magnitude of day-count convention effects. As interest rate swaps are very common amongst municipal and other institutional investors, we urge investors to thoroughly understand these and other `fine print' terms in any potential agreements. In particular, we highlight the ability of financial intermediaries to effectively increase their fees substantially through their choice of day-count conventions.

Keywords: Day-Count Convention, Interest Rate Swaps

JEL Classification: E4, P43

Suggested Citation

Deng, Geng and Dulaney, Tim and Husson, Tim and McCann, Craig J., Isolating the Effect of Day-Count Conventions on the Market Value of Interest Rate Swaps (May 1, 2012). Available at SSRN: https://ssrn.com/abstract=2049501 or http://dx.doi.org/10.2139/ssrn.2049501

Geng Deng

Wells Fargo ( email )

1753 Pinnacle Dr
7th Floor
Mc Lean, VA Virginia 22102
United States

Tim Dulaney (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NW
Washington, DC 20549-1105
United States

Tim Husson

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC Washington, DC 20549
United States
202-551-6803 (Phone)

Craig J. McCann

Securities Litigation and Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States

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