Module II· Cost of Equity & CAPMIntermediate
Question
Why take the 10-year government bond as Rf, not the 30-year?
Answer
Arguments for the 10Y:
- Market standard in IB.
- The 10Y matches the typical forecast period plus the terminal-value weighting.
- The most liquid point on the government-bond curve. Arguments for the 30Y (theoretically cleaner): matching the cash-flow duration of a perpetual going-concern valuation. But: the 30Y contains a term-premium component (a liquidity premium for the long maturity), which strictly speaking should not be part of Rf.
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Consequence
The 10Y is nearly universal; the 30Y only in infrastructure / concession valuations with long cash-flow profiles.