What is the appropriate risk free rate to use for a seven-mth investment period?
if we have a 1yr govt bond rate, how can we convert that to a seven-mth int rate? and is this appropriate?
Answers:
There are 6 month t-bills. Or you could use the yield on an off-the run one year that has seven months to maturity.
Or you could take the One year and convert it by adding 1, raising that sum to (7/12) and then subtracting the one.
ex. One year rate: 4.87% (as of 5/14)
So [1.0487^(7/12)]-1 = 2.82%.
It might be appropriate, depending on what you're doing. Generally rates are annualized. If you're using a 7-month rate, you'll have to be very careful to make sure that you're comparing 7 month rates with 7 month rates and that nothing in your calculations is annualized. An annualized number will throw you off.
8 month free risk CD 5.10% or more
3 month CD , 6 month, ...
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