Thursday, May 10, 2007

Calculate interest on 365 days

Should a bank calculate interest based on 360 days or 365 days?

A long time ago, I used the 360 day method. I take each month as 30 days. I ignore the 31st day of each month. But, I charge 30 days for February. This was done to make it easy to write the computer programme.

With advances in computer languages, it is now easy to compute each year as 365 days. It is better to use 365 days, so that each day is counted correctly. We still have to ignore 29 Febuary in each leap year (i.e. every 4 years). Nobody will bother about it.

Conclusion: better to use 365 days to calculate interest.

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