A method for calculating interest, frequently used in mortgages and other fixed-income securities, simplifies the year by treating each month as having 30 days and the year as having 360 days. For instance, if the annual interest rate is 6% on a principal of $100,000, the monthly interest is calculated as (6%/360) $100,000 30. This yields the interest for a single month, representing the cost of borrowing the capital for that period.
This convention provides ease of calculation and standardization across various financial instruments. Its historical relevance stems from the era before readily available computing power, where manual calculations demanded simplified assumptions. While potentially resulting in slight variances compared to actual day count methods, the predictability and ease of implementation offer significant advantages for lenders and borrowers in understanding and managing their financial obligations.
