Chapter 2 What is Money Market Basis?
Money Market basis uses a day count fraction equal to the actual number of days of the investment period divided by 360. A Key exception is the UK (and several other Commonwealth countries) where the denominator is either 365 or the actual number of days in the year (the latter could be either 365 or 366, depending on whether it was a leap year or not). Money market basis is also called actual over 360 basis.
Example
If USD 1,000,000 is invested at 10% for one year using money market basis, then the investor would receive the following interest payment:
Interest = USD1,000,000*10%*365/360 = USD101,388.89
The investor would have received USD 100,000 on a bond basis
It is clear that the calculation of interest using the money market basis method is more attractive for the investor than the bonds basis method. The annual interest (for a non leap year) under the money market method amounts to 10.13889%.
The term “money market basis” comes from the fact that interest on many money markets instruments is calculated according to the actual number of days elapsed, compared to a “standard” year of 360 days. Therefore, the terms “money market basis” and “actual over 360 basis” are often interchangeable.
