Q 73. Lots more information in this question than you need, but they use the 10-year bond as the RFR instead of the 3-month t-bill. Why are they not using the 3-month Tbill as the RFR? … the 10 year bond would have additional risk premiums built into it for yield curve risk, inflation risk, and sovereign risk, which is in agreement with its yield being 50 bp higher. Any help appreciated.
I believe the rule of thumb is that when you are dealing with an individual investor, the 3 month Treasury Bill is RFR, however when you are looking at it from the perspective of a corporation or for capital budgeting purposes, then you look at the 10 year treasury bond as the RFR. I don’t get the logic either. A 10 year bond is hardly what I would call Risk Free considering it’s subject to purchasing power risk, interest rate risk, reinvestment risk, political and legislative risk etc etc etc.
u have to read page number 57 in the cfa book and the footnote to see y