Discussion Paper
Options for Calculating Risk-Free Rate
Abstract: One of the most fundamental concepts in finance is the notion of a risk-free rate. This interest rate tells us how much money investors are guaranteed to receive in the future by saving one dollar today. As a result, risk-free rates reflect investors’ preferences for payoffs in the future relative to the present. Yields on U.S. Treasury securities are generally viewed as a standard benchmark for the risk-free rate, but they may also feature a “convenience yield,” reflecting Treasuries’ special, money-like properties. In this post, we estimate a risk-free rate implicit in the prices of S&P 500 index options—called the box rate—to measure investors’ time preference separate from Treasury convenience yields.
Keywords: risk-free rates; Treasuries; Convenience Yield;
JEL Classification: G1;
Access Documents
File(s):
File format is text/html
https://libertystreeteconomics.newyorkfed.org/2023/10/options-for-calculating-risk-free-rates/
Description: Full text
Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2023-10-02
Number: 20231002