Damodaran states in "Investment Valuation" that a good proxy for the risk-free rate in a country would be it long term growth rate. What about Brazil's interest rate of more than 10% (considering Brazil has been growing at about 5%) and China's much lower interest rate (while it's expected growth rate is higher than Brazil's)?

Question

anonymous · Answer

See the interest rate you are talking is something else that is it is related to the deposit rate or, you can say the bond's yield rate. And the growth rate of a country is different entity. See Brazil has an interest rate of 10% and growth rate is 5% while China which is developing more rapidly than Brazil has interest rate of 6.5% (lower than Brazil) and growth rate higher. Here you have to consider the inflationary rate of both the countries. China has inflationary rate of 6% while Brazil has inflationary rate of 7% it means that the value of Brazilian Currency is depreciating more rapidly than that of Chinese Currency. In short last year you were able to purchase 1 unit of any commodity at a price of let us say $ 100 but this year the same commodity is worth $ 107. Simmilarly in China you might have purchased the same commodity at a price of $ 100 ( last year) while this year you can purchase it by paying just $ 106 which is less than the price that you will require to pay in Brazil. Actually the interest rate is dependent on the Time Value of Money. Normally due to inflation it is said that with time the value of money decreases. Hence, due to high inflationary rate Brazil has a higher interest rate than China.

anonymous · Answer

andre, the growth to which you refer is the real growth.

Damodaran states in "Investment Valuation" that a good proxy for the (NOMINAL) long term growth rate is the (nominal) risk-free rate in a country. 

Therefore, multiply that growth of 5% by (1+CPI ) and compare it with the nominal yields, indeed, check out how it works.