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.

Some research suggests that the Certainty Equivalent Interest Rate might reasonably exceed the

riskless rate by about 1.

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 of return.

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 around.

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].