Anonymous

# Why do banks, when they calculate daily compound interest use 360 days instead of 365 days?

good explanation helpful, or a source.

Again, why do banks count a year as 360 days instead of 365 when calculating daily compound interest?

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• Anonymous

"1. Assume a \$100,000 note dated June 1 for 90 days at an interest rate of 12 percent. The textbook calculation is as follows:

\$100,000 x (12 / 100) x (90 /360) = \$3,000.00

2. A more precise calculation is as follows:

\$100,000 x (12 / 100) x (90 /365) = \$2,958.90

>>> 3. When large sums are involved, the 360-day method (known as ordinary interest or banker’s rule) yields significantly more interest to the lender. It is used by banks and commercial organizations. <<<

4. The second method (known as exact interest) is used by the federal government and the Federal Reserve System."

[ Scroll down about 2/3 of the way on this link ]

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"You may see either of these figures because accountants used a 360-day year to simplify their calculations before computers and calculators became widely available..."