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.
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
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].
Economists generally argue for a riskless rate
- about 5 percent.
x,c] = 0, both the maximum expected return and the growth unlevered cost of capital equal the riskless rate
m]: the equilibrium expected return on the market portfolio; r: the riskless rate
of interest; [[beta].
Insurance companies need to convince investors to buy risky shares and the only way to do so is to promise them an expected return that is higher than the riskless rate
In this discussion, he goes on to mention that the opportunity cost or carrying charges for the hedge should be included and therefore, the riskless rate
of interest would enter into the bounds.