Risk Free Rate for UK and US
Updated three FAQ answers – particularly in response to queries about getting risk-free rate in Datastream (but also added information about Bloomberg).
- Where can I find historical rates for U.S. treasury bills, notes, and bonds?
- Where can I find historical rates for UK Government bonds (Gilts, Treasury bills)?
- How can I find a historical risk free rate for different countries?
Note, finding a risk-free rate is complicated not just by the alternative sources available, but also because the risk-free rate required can depend on the context of its use.
- The most requested is
3 month Treasury bills, recommended by Thomson Reuters (Datastream) and many others. There is the most historical data for these. For example the UK, UKGBILL3 (monthly – base date Jan 1972) and UKTBTND (daily – base date 04 Jan 1985). - Fama French benchmark factors are calculated using 1 month Treasury bills, but historical data can be limited. For example, the UK UKTBT1M on Datastream has a base date of 10 Mar 2000.
See also Risk Free Rate and Fama French factors – posted Jan 2013 - Bloomberg
uses 10 year government bond rates as the risk-free rate in its Country Risk Premium (CRP) and related functions. (This makes it easier to handle countries that do not issue Treasury bills in a consistent fashion.)
(For those interested there is a paper “What is the riskfree rate?” on Damodaran Online.)
The last Risk Free Rate post was Nov 2009. These updates have been prompted by queries and also recent news. With the turmoil about the US credit downgrade at the beginning of this month, there is of course debate about what is the risk-free rate if there is a chance of a country defaulting. For example see:
- http://aswathdamodaran.blogspot.com/2011/07/sovereign-ratings-downgrade-for-us-end.html
- http://www.bbc.co.uk/news/business-14430643 - As the US loses AAA, where is a safe harbour?
So what to choose as a good estimate of the theoretical risk-free rate could get harder rather than easier.
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how to I get Risk free rate and equity risk premium in datastream. I got this data from Bloomberg using CRP function. Please assist.
The risk free rate used by Bloomberg is the yield on a 10 year treasury security (10 year govt bond / gilt ) which is available in Datastream. Many researchers use the yield on a 3 (or 1) month treasury rather that the 10 year one as mentioned above.
The equity risk premium is calculated by Bloomberg as the “Expected Return on Market” -(minus) “Risk Free Rate”. To be honest, I do not fully understand how the “Expected Return on Market” is calculated but it is done with reference to the market index UKX (the FTSE 100). The CRP Help page describes the dividend yield, the growth rate, the payout ratio, and the expected market return but you need more financial knowledge than I have to understand the calculations described.
I don’t think that the “Expected Return on Market” or the “Equity Risk Premium” are directly available on Datastream. You would have to do the calculations to get these from the basic data.
i m working on assignment where i found beta using 10 yr data of a company. now to calculate capm do i need to find 10 yr risk free rate or 3 months? what is risk free rate for uk govt bonds?
The risk free rate is a theoretical rate. For your assignment, you need to choose the rate that is the best approximation to this theoretical rate for your analysis. (This may depend on the availability of the data.) For UK, I’d recommend using the 3 month treasury bill rate unless you have a reason for choosing a different UK govt bond / gilt rate. Various sources are mentioned in the FAQ answer above.
I am currently working on my dissertation, I want to access to the Thomson Reuters Datastream on my own laptop, where can I find the datastream ? as I cannot find it on the Reuters site.
thanks .
Licence and software restrictions mean that Datastream (like Bloomberg Professional) is only available on specific PCs. Thomson One Banker does have a web interface and has similar coverage to Datastream for active companies. See http://bizlib247.wordpress.com/2012/06/28/researching-financial-markets-equities-indicies/ for more details.