Question

In general, how do credit analysts determine the risk-free rate? A. The average corporate yield B. The yield on U.S. Government borrowings C. The rate defined by the largest U.S. banks D. The weighted-average corporate yield based on the preceding four quarters E. None of the above

Answer 1

The correct option is B,the yield on U.S Government borrowings

Step-by-step explanation:

The risk free rate is the usually the rate of return on Government borrowings since the Government is not likely to default in its borrowing obligations unlike corporate organizations,it is assumed that the rate payable by Government has no element of risk such liquidity or default risk.

The concept here is that there is positive correlation between risk and return-that a lower risk brings about a lower return.