What does Actual/360 represent in lending?

• A. A day-count convention
• B. A loan term
• C. A payment frequency
• D. A rate

Answer: (A)

Actual/360 is a day-count convention used to determine how much interest accrues over a given period. It works by counting the actual number of days in the interest period (the numerator) and dividing by 360 (the denominator). If a loan is quoted with an annual rate, the interest for that period equals the annual rate times the actual days divided by 360. This isn’t a loan term, a payment frequency, or the rate itself—it’s the rule that translates time into a portion of a year for interest calculation.

For example, with a 6% annual rate and a 90-day period, interest is 0.06 × 90/360 = 0.015, or 1.5% of the principal. If the period were 183 days, it would be 0.06 × 183/360 ≈ 3.05% of the principal. Different conventions change the denominator (e.g.,Actual/365 uses 365), so the same rate can produce slightly different interest amounts under different systems. Actual/360 is common in short-term lending and money markets because it provides a simple, consistent way to compute accrued interest.