What does economic theory have to say about the extent to which exogenous changes in short-term and/or long-term riskless rates ought to affect asset prices, and by what channels?
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.
9) Since private borrowing, lending, and spending decisions presumably depend on (risky) non-Treasury rates, reducing their spreads over (riskless) Treasuries reduces the interest rates that matter for actual transactions even if riskless rates are unchanged.
As mentioned earlier, riskless rates per se are almost irrelevant to economic activity.
Pre-tax cost of debt = Riskless rates + default spread
The components that go into measuring the cost of equity using the CPM include the riskless rate, the market risk premium, and the beta of the firm, product, or division.
The last three lines present the prices when the riskless rates in the two countries differ with .
Unless stated otherwise, all standard deviations are 15 percent, the riskless rates in the countries of lending are 10 percent, in the country of borrowing, 5 percent, and in the local country, 6 percent.
5) Thus, we assume that investors' expectations of the real risk-free rate of interest during year t are based on a linear combination of both the actual real riskless rate
during year t - 1 and the difference between the actual and expected real riskless rates
during year t - 1.
Comparisons of riskless rates
such as yields on government securities ignore relevant risk differences.
It shows the same general pattern, although for both softwoods and hardwoods, the bias caused by using first calendar year market and riskless rates
is less severe than that caused by using second calendar year rates.
Theoretically, the difference between the total rate of return and the safe rate is considered a premium to compensate the investor for risk, the burden of management, and the illiquidity of the capital invested; also called riskless rate
or relatively riskless rate