Which of the following is the most common method of interest calculation?

• A. 31/365
• B. Actual/360
• C. Actual/365
• D. 360/360

Answer: (B)

Interest is typically calculated using a day-count convention, which converts the actual number of days between dates into a fraction of a year to apply the interest rate. The most common approach is Actual/360: you take the actual days that pass and divide by 360, then multiply by the rate and principal to get interest. Banks and money markets widely adopt this convention because it gives a simple, standardized method for daily accruals and tends to be consistent across many short-term instruments.

For example, if 90 days pass on a loan with a 6% annual rate, interest ≈ principal × 0.06 × (90/360) = principal × 0.015.

Actual/365 uses a 365-day year and is used in some markets, but it isn’t as universally adopted as Actual/360. The other options aren’t standard conventions: 360/360 isn’t a recognized day-count method, and 31/365 isn’t a standard approach either.