Risk free rate

CFA Level III
#1

Which one should be taken as risk-free rate?

1 Year T-Note

10 Year Treasury bond.

Thanks,

#2

It depends.

What’s your holding period?

Are you using CAPM, or or Fama-French, or something else?

And other stuff.

#3

Not sure about the holding period.

This is from EOC 3 in Capital Market Expectation. (reading 16)

An investor is considering adding three new securities to his internationally focused fixed-income portfolio. The securities under consideration are as follows:

  • 1-year US Treasury note (noncallable);
  • 10-year BBB/Baa rated corporate bond (callable);
  • 10-year mortgage-backed security (MBS) (government-backed collateral).

The investor will invest equally in all three securities being analyzed or will invest in none of them at this time. He will only make the added investment provided that the expected spread/premium of the equally weighted investment is at least 0.5 percent (50 bps) over the 10-year Treasury bond. The investor has gathered the following information

#4

Doesn’t the question specify the 10y T-bond?

#5

I think they give the 1-year t–bill rate + the spread to the 10-year or something of that nature.

#6

I always thought the risk-free rate was T-Bond.

Anyway for a 10 year corporate callable bond, wouldn’t comparable risk free rate be 10y T-Bond rate?

so T-Note + the spread over 10-year would be risk free in my opinion.

so when they add all the risk premiums in part B, that 1% shouldn’t be added because its not a risk premium.