What Is the Daily Factor?
The daily factor is a decimal figure representing the annual yield of an investment. They are used to compare the return on investment associated with different securities.
Daily factors are often reported alongside the current annualized yield figures and can be translated back to the current yield percentage by multiplying the daily number by 365.
- The daily factor is a way of quoting the yield of a bond.
- It shows the yield as a decimal representing the interest for a single day.
- The daily factor is used mostly by income-conscious investors, or by institutional investors working with very large sums.
How the Daily Factor Works
The purpose of the daily factor is to show the yield, or interest income, associated with a single calendar day. By convention, the daily factor is calculated either by using a presumed 360-day year, or by using a 365-day year. Investors should ensure they understand which convention is being used when comparing daily factors for different instruments.
Daily factors are often used by large institutional investors, for whom a single-day’s interest income could represent a meaningful sum of capital. Another group that often uses daily factor quotations are income-oriented investors, such as retirees, who are dependent on regular cashflows from their investments. For these types of investors, the granularity of the daily factor calculation can be helpful for keeping track of how much interest they are likely to earn in a day, week, or other short period of time.
Two areas where investors are likely to encounter daily factor quotations are in the market for bank certificates of deposit (CDs) and Treasury bonds. As an example, the daily factor for a certificate of deposit (CD) which trades for a current annual yield of 5.35 percent is .000147 (.0535/365=.000147). In this case, the CD would earn 1/10,000 of a cent per day.
Real World Example of the Daily Factor
Dorothy is a successful entrepreneur who recently sold her business for $2 million in cash. In deciding where to invest these proceeds, she decides to review the corporate bonds issued by XYZ Corporation. The bonds have a face value of $1,000 and pay interest of 3% per year.
The XYZ bonds are currently available in the market at a discount, and can be purchased for only $800. Therefore, if she were to purchase the bonds, she would enjoy a yield of 3.75% ($30 of interest divided by the $800 market price). Using a 365-day year, Dorothy calculates that the daily rate of this bond purchase would be approximately 0.01% per day (0.037 divided by 365 days). Assuming 30 days per month, this would work out to about 0.30% per month, or $6,000 if Dorothy were to invest her full $2 million proceeds.