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Is the risk free rate of return on a given market equal to the central bank of that country?
I am currently doing a project on mergers and acquistions, i have to reference a risk free rate for the FTSE 100, would it be correct to assume that the rate of return of investing in the central bank of england aka the bank rate is the markets fisk free rate (rf)
Any advice or direction would be greatly appreciated
4 Answers
- 1 decade ago
The risk free rate is not set in stone and it's not 100% risk free (even a Central Bank could default although is quite unlikely).
It's basically the rate investors are willing to receive for the safest investment they can find. You can use a multiyear average or you can use the current yield on a long bond.
- 1 decade ago
The first answer is correct - choose the short-term government security (note however, that this is usually NOT equivalent to the rate set by the central bank that you read about in the paper - you're going to need the actual rate on the security).
- Anonymous1 decade ago
choose the shortest term treasury offered by the Central Bank of England & go with that as your risk free rate of return. In the U.S., the 3-month treasury is generally accepted as such.
