Frequently Asked Question
The interest rate used to define the “risk-free” rate of return is the:
a. discount rate.
b. 90-day Treasury bill rate.
c. five-year Treasury note rate.
d. federal funds rate.
Answers: b
The 90-day Treasury bill rate is used because there is no credit risk, and the maturity is so short that there is no liquidity or market risk. The five-year Treasury also has no credit risk, but if interest rates rise, the market value could decline.
b. 90-day Treasury bill rate.
c. five-year Treasury note rate.
d. federal funds rate.
Answers: b
The 90-day Treasury bill rate is used because there is no credit risk, and the maturity is so short that there is no liquidity or market risk. The five-year Treasury also has no credit risk, but if interest rates rise, the market value could decline.
by
Investopedia Staff
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