Which Treasury Maturity do I use as a risk-free rate to value a company?

CFA General
#1

Hello,

I am attempting to construct my first valuation model, and I am valuing a company that has been in the industry for more than 50 years. I am attempting to construct CAPM, but I am stuck on the “Risk-Free-Rate” component.

I visited https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

My questions are the following:

  1. Which maturity is best to choose? 2) Is the table on the website referring to Treasury bonds or Treasury bills (sorry novice question, but I am really not sure).

Thank you!

#2

What’s your anticipated holding period?

#3

Hello Magician,

Well my assumption is that I will takeover this company for good and run it myself, and saying that, I believe now that I should choose the longest maturity possible. Correct?

#4

The risk free rate in CAPM model is usually the long-term treasury yield, typically 10-year on-the-run treasury yield, which is 3.23% from that website that you linked.

#5

Yes adtt,

But is this for a treasury bond or bill? (I haven’t reached fixed income yet, but I need to submit this soon).

#6

In the US:

Treasury bills have an original maturity of less than one year.

Treasury notes have an original maturity of 2 – 10 years.

Treasury bonds have an original maturity longer than 10 years.

Therefore, the 10-year on-the-run treasury yield will be for a T-note, not a T-bill and not a T-bond.