When we computer the cost of equity using the CAPM approach, The formula is: RFR + B(Rm - RFR) When we are given the Rate or return on a t-bill vs. rate of return on a bond, why do we use the bond rate as the RFR? Isn’t the T-bill rate commonly referred to as RFR or am I mistaken? See Question # 73 Morning Mock Thanks!
Normally T-Bills is the best reference for RFR, however for capital budgeting analysis, since we are dealing with long term projects we use the Treasury Bonds ( as opposed to T-Bills) as a proxy for RFR. Hope this helps.
bingo
i never saw this in the book till i saw a question about it…
Are there cases in which you would use the T-Bill rate?
Its in CFAI book 4 on page 40 or so something or other, they make direct reference to using the t-bond because its maturity more closely matches the maturity of the project.