hello guys i was curious to know that how can we find risk free rate in a country like for example in USA is the risk free rate the rate on treasury bills, i filtered that on their treasury site however there was something like 13 weeks 52 weeks equivalent etc and its given in decimal points and not percentages so i was quite confused can you guys help me out?
In theory, the risk-free rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate.
In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate for U.S.-based investors.
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It depends on what you are using the numbers for. The most common proxy for the “risk free rate” is the libor or market swap spreads, since these are freely tradable by most institutions. However, if you are deploying capital, it might make sense to use your own cost of capital instead.
Why would it be better to use those rather than the t-bill rate?
Because the treasury rate is a special rate that is governed by very specific supply and demand, and is available to only one entity, the US government. Even if you had no default risk, you would not necessarily issue debt at that same rate. It is better in practice to choose a benchmark that is commonly and reliably available to private entities. Furthermore, libor is a benchmark rate for financial institutions to lend to one another, so it better reflects the carrying cost of fully collateralized debt.
In any case, the “risk free” part is mostly academic. In practice, everything has some kind of market determined rate and we use spreads to libor as a measurement to compare the rates to one another.
Thanks alot guys but its given in decimals, should i like assume they are percentages?
I don’t know where you pick your data, but if it’s written 0.80 or something like that, it means 0.80% obviously