Module II· Cost of Equity & CAPMBasic
Question
What is the risk-free rate, and which bond do you use?
Answer
Standard
The 10-year government bond in the currency of the cash flows (e.g. the 10-year US Treasury for USD).
Why
A highly rated sovereign issuer servicing debt in that currency — the closest thing to a default-free rate.
Currently
typically 2.0–2.5% (after the 2022 rate rise).
By region
always match the sovereign to the cash-flow currency — a euro-area 10-year benchmark for EUR, gilts for GBP, US Treasuries for USD.
Careful
USD targets use the 10-year US Treasury — never mix EUR and USD cash flows with a single-currency risk-free rate.