hi all,

inquiry abut risk free rate for DCF valuation for a US company.

I can have 10 year Zero Coupon T bond yield as nominal risk free rate. Currently this is at 1.635% (as per bloomberg; http://www.bloomberg.com/quote/F08210Y:IND). Is this correct?

For 10 year real risk free rate, I use TIPS 10 year bond yield. This is -0.66 % as per bloomberg(http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ ). Is this correct?

Am I missing something here?

Thanks for the help

regards
saurabh

Question

hi all,

inquiry abut risk free rate for DCF valuation for a US company. 

I can have 10 year Zero Coupon T bond yield as nominal risk free rate. Currently this is at 1.635% (as per bloomberg; http://www.bloomberg.com/quote/F08210Y:IND). Is this correct?

For 10 year real risk free rate, I use TIPS 10 year bond yield. This is -0.66 % as per bloomberg(http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ ). Is this correct?

Am I missing something here?

Thanks for the help

regards
saurabh

anonymous · Answer

Depending on the tenure or term of the business or venture you can choose the corresponding risk free rate. If you are looking at a 5-year cash flow then taking the 5-year bond's rate may be appropriate.

anonymous · Answer

I think the rate of zero coupon bond should not be taken because the investmetn in ZCB is not liquid and can be redeemed only at maturity.

anonymous · Answer

I don't think so, ZCB is tradable, albeit may not be reflective of the closest risk-free rate.

May I know why a 10-y treasury is not used instead?