Accrual fraction

The length of an interest period as a fraction of a year, such as 90/360. It scales an annual rate into the interest actually paid for that period.

Where you will meet it

Accrual fraction appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain the pricing of interest rate forwards and futures, and work out their no-arbitrage value and say what it means
  CFA Level II · Derivatives and Risk Management

  “For an FRA covering the period from h to h + m, [1 + MRR(h + m) × t(h + m)] ÷ [1 + MRR(h) × t(h)] − 1 gives the period rate, annualised by dividing by the accrual fraction m.”

• Use a two-period binomial model to value an interest rate option and explain the result
  CFA Level II · Derivatives and Risk Management

  “The underlying is a rate, so a call (like a caplet, but paid when the rate is set) pays notional × max(0, rate − strike) and a put (like a floorlet) pays notional × max(0, strike − rate), adjusted for the accrual period.”

• Explain how the Black model values European swaptions and European interest rate options
  CFA Level II · Derivatives and Risk Management

  “A caplet, a call on a future reference rate, is worth c = notional × accrual fraction × discount factor to the payment date × [FRA × N(d1) − X × N(d2)], paid one period after the rate is set.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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