20- and 10-year spot yields on T-bonds favored for risk-free rate

BVWireIssue #203-1
August 7, 2019

cost of capital
cost of capital, discount rate, private company valuation, risk analysis, cost of equity

Two-thirds of survey respondents say they use the spot yield on Treasury bonds for their risk-free rate when developing an estimate for the cost of capital, according to BVWire’s latest survey. Most (58%) use the 20-year spot yield and the rest (9%) use the 10-year spot yield. A quarter of respondents use a “normalized” risk-free rate developed by Duff & Phelps, and the remainder use something different (e.g., a 30-year spot yield) or a custom rate. Most respondents who use the spot yields get their information right from the U.S. Treasury website.

The concept of normalizing the risk-free rate emerged around the time of the financial crisis and is generally based on historical rates. A number of thought leaders strongly disagree with the use of a normalized rate, such as Chris Mercer of Mercer Capital (see his post on this topic) and Professor Aswath Damodaran of the New York University Stern School of Business, who writes that “a valuation is an assessment of the future as of right now, and you have to use the current risk-free rate.”

We had 70 responses to our survey, so our thanks to those who participated! We’ll have the next installment in our series of cost of capital surveys in the next issue of BVWire.

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