RETURN ON INVESTMENT

Actual/Actual
Treasury notes, bonds and STRIPS use an Actual/Actual (in period) day
count convention. When calculating the number of days between two
dates, the Actual/Actual day count convention uses the actual number of
calendar days as the name implies. Let’s illustrate the Actual/Actual day
count convention with a 3.625% coupon, 2-year U.S. Treasury note with
a maturity date of August 31, 2003. The Bloomberg Security Display
(DES) screen for this security is presented in Exhibit 2.1. In the “Security
Information” box on the left-hand side of the screen, we see that the day
count is specified as “ACT/ACT.” From the “Issuance Info” box on the
right-hand side of the screen, we see that interest starts accruing on
August 31, 2001 (the issuance date) and the first coupon date is February
28, 2002. Suppose this bond is traded with a settlement date of September
11, 2001. How many days are there between August 31, 2001 and
September 11, 2001 using the Actual/Actual day count convention?
To answer this question, we simply count the actual number of days
between these two dates.3 To do this, we utilize Bloomberg’s DCX (Days
Between Dates) function presented in Exhibit 2.2. The function tells us
there are 11 actual days between August 31, 2001 and September 11,
2001.4 In the same manner, we can also determine the actual number of
calendar days in the full coupon period. A full 6-month coupon period can
only have 181, 182, 183 or 184 calendar days. For example, the actual
number of days between August 31, 2001 and February 28, 2002 is 184.

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