Banks quote interest rates on a simple annual basis. These are known as quoted (or nominal) rates. They often need to be manipulated in order to undertake modelling calculations. Since different money markets quote using different conventions, it is important that the modeller understands how the quoted rate should be manipulated.

3. Financial modelling should be collaborative. Collaboration
reduces error, speeds up development time and lowers
cost. The Financial Modelling Handbook is a collaborative,
crowd-sourced guide to building better financial models
using the FAST Standard.

4. Andrew Berkley is Managing
Director and Lead Modelling
Instructor at F1F9. Andrew is a
Chartered Accountant with a
background in financial advisory
and business education.

5. Banks quote interest rates on a simple annual basis. These
are known as quoted (or nominal) rates.
They often need to be manipulated in order to undertake
modelling calculations.
Since different money markets quote using different
conventions, it is important that the modeller understands how
the quoted rate should be manipulated.

6. Quoted rates should be converted into periodic rates in order to calculate interest
costs.
For a rate quoted on a simple annual basis, the following conversion is required:
Periodic rate (%) = Quoted rate (%) x actual days between 2 dates / standard
days in year

7. Actual days are assessed from midnight to midnight. So from midnight on 31
December to midnight on 1 January (the next day) is 1 day.
How many days are there between 1 January and 31 January? Answer: 30 days.
But interest for the month of January is calculated based on midnight 1 January
(i.e. just after the end of 31 December) to midnight 31 January – 31 days.
This is best modelled on the Time sheet . . .

8. Assuming model period end dates and interest setting dates are aligned (they
often are), actual days between 2 dates is (i) the current model period end date
less (ii) the previous model period end date.
Note the use of the first model column flag and model period beginning dates
to arrive at an appropriate day count for the first column.
Confirm for the first column: there are 31 days in March.

9. Standard days in the year depends on the currency of the quoted interest rate.
•
•
•
US dollars (USD) and Euros (EUR) both use 360 standard days in the year.
Sterling (GBP) and some Commonwealth countries use 365 standard days in year.
Other markets use actual days in the year (365 or 366 depending on whether or not
there is a leap year).

10. A quoted return of “8% 31 day” for a USD
denominated investment generating a
periodic return of:
8% x 31 / 360 = 0.69% every 31 days
Banks quote interest rates on a simple annual
basis. These are known as quoted (or nominal) of “8% 31 day” for a GBP
A quoted return
rates.
denominated investment generating a
periodic return of:
They often need to be manipulated in order to
undertake modelling calculations. 8% x 31 / 365 = 0.68% every 31 days
Since different money markets quote using
different conventions, it is important that the
Other conventions include: act / act, 30 / 360, 30E / 360. Some markets quote on a discount
modeller understands the amount quoted rate end, not the initial investment.
basis i.e. the % is based on how the redeemed at the
should be manipulated.
It is important that modellers check the term sheet provided. Different markets use different
conventions and getting the convention wrong can have a material impact on your model.