A convention which defines how interest accrues over time. It helps determine the interest earned between two dates which don’t necessarily mark the beginning and end of a reference or standard period. Mathematically, the interest earned between two “generic” dates is the product of “the number of days between the dates” and “the interest earned in the reference period” divided by “the number of days in the latter period”.

Conventions vary across countries and instruments. For example, in the US, day count follows one of three conventions: actual/actual, actual/360, and 30/360. The first is used for US treasury bonds. The second is used for U.S money market instruments, while the third is followed in pricing corporate and municipal bonds in the US. In Canadian money markets, an actual/365 convention is used (not the actual/360).