The Actual/Actual AFB day count convention is explained on Wikipedia here. I'll condense the rules here the way I understood them.
- Factor = Days(Date1,Date2)/DiY
- If 29th february is in date range from Date1 (inclusive) to Date2 (exclusive), DiY=366 else DiY=365
- If date range from Date1 to Date2 spans multiple years, calculation is split in two parts:
- Number of complete years counted back from the last day in the period
- The remaining initial stub, calculated using the basic rule
- ISDA additional rule: If counting backwards for multiple years, if the last day of the relevant period is 28 February the full year should be counted back to 28 February unless 29 February exists in which case 29 February should be used.
Now consider the case
Date1 = 2004-02-28 and
Date2 = 2008-02-28. Applying the rules gives:
- 4 full years
- Date2' = 2004-02-29 [rebased Date2 by counting back + ISDA additional rule]
- DiY = 365, because: Date1 = 2004-02-28, Date2' = 2004-02-29; 29 February is not in date range from Date1 (inclusive) and Date2' (exclusive) i.e. the remaining initial stub
- Factor = 4 + 1/365
However, in the example on the Wikipedia page I linked to at the top it shows for those same two dates that
Factor = 4 + 1/366. Which factor is correct? And if the result of the Wikipedia page is correct, where did I go wrong with my reasoning?