What is the criteria to pick the Risk free rate?
I screwed up an interview when they asked me to go trough a DCF model. When I was explaining them how to calculate the Cost of Equity using the CAPM, they asked me 2 questions that I did not expect.
- Why do bankers pick the yield of a 10-years treasury bond instead of a 20-year bond or a 5 year bond?
- Which yield do they pick? The current yield, or the average yield for the past 50 weeks?
I'd say:
1) Use 10-year because that matches the length of the DCF
2) Not sure. Interested in what people have to say
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