Question about Risk free rate solution, about, should, return

nixie24

Which rate should I use for risk free rate, the rate of return for 10year T-bond or 3month T-bill?

The solution to last years mock exam Q73 says it should use 10year T-band rate. Is that solution wrong?

Benjiko

match the risk free rate with the duration implied in the question.... money market typically deals with T-Bills where as capital budgeting (longer term) deals with T-Bonds

Flok

yes, it's depend on your maturity. You match the maturity of your non-treasury issue with the maturity of any on-th-run treasury issue