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?
Let us begin with the effect on [P.sub.t] of a permanent change in the riskless rate r.
(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.
any long-term solution must require full funding of accrued liabilities (measured at riskless rates
) at all times."
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 .07/.13 meaning .07 in the first country and .13 in the second.
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
Estimates of the expected real riskless rate
were obtained from an ARIMA model based on past realized risk-free rates, themselves calculated as the rate of change in the period-average value of a series of one-month Treasury bills (calculated from values at the conclusion of each month taken from Ibbotson Associates |1988~) less the rate of change in the corresponding period-average CPI.