This method represents a means of simplifying interest computations, primarily within the realm of short-term lending and mortgage calculations. It presumes that each month contains 30 days and that a year consists of 360 days. As an illustration, consider a loan accruing interest at a rate of 5% annually. Under this convention, the daily interest rate would be 5%/360, and the monthly interest would be calculated using 30 days, irrespective of the actual number of days in a given month.
The primary advantage of this approach lies in its computational ease, especially in the pre-computer era. It provided a standardized and readily calculable method for determining interest accrual. Historically, its adoption stemmed from a desire for simplification and uniformity across different financial institutions and instruments. While the actual number of days in a year or month may vary, the consistency of using these fixed values facilitated easier comparison and management of financial products.
