Angie · learn

Risk-free rate

The 10-year Treasury yield, standing in for the return available with essentially no risk. Every other rate in the model is built on top of it.

Updated 2026-09-03

The risk-free rate is the return available for taking essentially no risk, and it is the foundation every other rate in the model is built on. Angie uses the 10-year US Treasury yield.

The logic is simple. If a government bond pays 4.8 percent, no rational investor accepts less than that for an investment carrying real risk. Everything above it is compensation for that risk, which is what the equity risk premium and beta together set.

Because it sits underneath everything, a change in the risk-free rate moves every valuation on the board at once. A one-point rise adds roughly a point to every discount rate, and on a terminal value that is most of the answer, that is a substantial repricing of everything simultaneously. This is the mechanism behind the observation that rising rates compress valuations.

See also

  • Cost of equity — The return shareholders demand for owning this particular company. Known as CAPM, the capital asset pricing model.
  • Equity risk premium — The extra return investors demand for holding stocks instead of Treasuries. Beta scales it up or down for one particular company.
  • WACC — Cost of equity and cost of debt blended by how much of each the company uses. This is the rate every future dollar is discounted at, and it is the single most leveraged input in the model.

← See this one in the deck

Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.

IsiofiaIsiofia