Hi, now that Treasury Bonds don't have an AAA rating anymore, what other financial instruments can I use as "risk free rate" to estimate the cost of equity in CAPM. thanks !!!

Question

anonymous · Answer

By downgrading the bond from AAA to AA+, rating agency estimated that there is a default risk for US bonds (albeit small one). So to get from the bonds to risk free rate, you should subtract this small risk. The rate which is subtracted is called default spread and you can find it on prof. Damodaran's website