Saw this on sample exam: 90 day t-bill rate? or 10 year treasure rate? which one and why?
10-year rate! I remember getting a question wrong because of this! Because projects are going to last longer than 90-days and 10-year is more suitable; although, in my opinion, the 90-day should be used!
It depends from the question…I guess 10yr
I have read someplace that the 5 year T-note should be used, but I don’t know the validity of that. I don’t know if there is a right or wrong answer, but I would agree that between those two choices that the 10 year would be more appropriate.
I think because of the time horizon
because the 10yr is a better prox when you do valuation. You can use the 90 day as well…however depend from the legth of the investment of valuation you are considering
The risk free rate should match the time period of the project. For short projects using the 90 T Bill rate should be okay, where as using the same for long term projects would drastically underestimate the risk
I think the reason why it should match the time period of your investment if because the risk free rate is what you could be guarenteed to earn during the same time period by the appropriate treasury security. Using the CAPM formula, you are looking for the additional return you are looking for above that to compensate for that risk. Most investors won’t invest for 90 day periods, that is why I would say that between the two choices the 10 year would be better. Not saying that you can’t use the 90 day if that is your time horizon.
10 yr, for sure. You are looking at stocks. Stocks are calls on companies. Most companies are presumed “going concerns terminally” so you have to use a RFR that matches your time horizon. I have read academic studies suggesting the 30Y is better, but it is not used b/c we have more data available on the 10Y than the 30Y, ironically. If in doubt, pick the 10Y
That is probably b/c 30 yr issuance was halted for a few years.
the old bond has been reinstated amber…just this past year
I know, but for historical use…