US downgrade - Risk free rate ? triple

Penny-wenny

Its interesting to watch, the RFR is an important concept in financial theory, and many formulas out there. If the US is downgraded does this make the RFR irrelevant in many financial formulas using US treasury's?

long-term U.S. government bonds are often used as the proxy for the risk-free rate in asset pricing models. Higher Treasury rates would then lead directly to higher discount rates, and that would reduce the fair value estimates of equities across the board. Although going from triple A to double A may not see huge swings in interest rates to matter for the RFR to change...

OR

may search for foreign debt to seek safe heaven and a 'risk free rate'. Going foreign will cause formulas to become inaccurate having to adjust for inflation measures and so forth becoming pretty complex. Its interesting to see how the next couple years play out if the US keeps getting downgraded because of our debt.

Whats your guys thoughts of this?



Edited 2 time(s). Last edit at Thursday, July 28, 2011 at 12:09PM by Johnnyboyasu.