We can use one-year Canadian Treasury Bill rate as ________ interest rate when we convert a unlevered beta to a cost of capital for an acquired firm.
A) a risk-free
B) a nominal
C) a real
D) an effective

Question

Quizplus · Accepted Answer

The one-year Canadian Treasury Bill rate is typically used as a proxy for the risk-free rate in Canada. It is used as the risk-free rate because government bonds are considered to have no default risk and are backed by the full faith and credit of the Canadian government. When converting an unlevered beta to a cost of capital for an acquired firm, we use the risk-free rate as a starting point, so A is the best choice. Nominal rate refers to the interest rate without any adjustments for inflation, real rate is the rate adjusted for inflation, and effective rate takes into account compounding periods and fees.

We Can Use One-Year Canadian Treasury Bill Rate as ________