However in long periods of history there were no inflation-indexed bonds, so to find a good empirical counterpart for the riskless rate
is not an easy task.
Pure arbitrage, where, in fact, you risk nothing and earn more than the riskless rate
When r follows a stochastic process that renders interest rate changes less than permanent, it remains true that the presence of the risk premium reduces the effect on asset prices of changes in the riskless rate
In the absence of risk aversion, the yield on cocos should then be equal to the riskless rate
for their remaining term plus a conversion risk premium that compensates for the expected loss conditional on conversion.
The riskless rate
for real estate is usually higher than what would be used for stock and options valuation, due to the illiquidity, maturity risk premium, lack of diversification, management intensity, and other risks associated with real estate investment.
The net cost is $548,812, precisely the same as if the liability had been discounted and funded using the 4 percent riskless rate
Since the credit risk premium is on top of the interest rate charged for riskless debt, the first step is to understand what moves that riskless rate
Under the risk-neutral probability measure, we can replace the drift coefficient [mu] by the instantaneous riskless rate
r, and hence R([T.
Also, Miles and Ezzell (1980, 1985) and Arzac and Glosten (2005) proposed to discount tax shields at the riskless rate
in the first period but at the unlevered equity rate thereafter.
The riskless rate
of interest is taken to be equal to the household's subjective discount rate, and, therefore, will also be denoted by r.
j], as being composed of the corresponding riskless rate
, r, plus a risk premium specific to that instrument, say [[rho].