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Options for Calculating Risk-Free Rate

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Abstract

One of the most fundamental concepts in finance is the notion of a risk-free rate. This interest rate tells us how much money investors are guaranteed to receive in the future by saving one dollar today. As a result, risk-free rates reflect investors’ preferences for payoffs in the future relative to the present. Yields on U.S. Treasury securities are generally viewed as a standard benchmark for the risk-free rate, but they may also feature a “convenience yield,” reflecting Treasuries’ special, money-like properties. In this post, we estimate a risk-free rate implicit in the prices of S&P 500 index options—called the box rate—to measure investors’ time preference separate from Treasury convenience yields.

Suggested Citation

  • William Diamond & Jules van Binsbergen & Peter Van Tassel, 2023. "Options for Calculating Risk-Free Rate," Liberty Street Economics 20231002, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:96994
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    More about this item

    Keywords

    risk-free rates; Treasuries; Convenience Yield;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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