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By looking at the following charts , i wondered about how to plot a fixed income security against a risk free bond.

I have the bond price time series but I am not sure what US T-Bill rate I should use as a benchmark for my plot.

My horizon would be 2-3 days so I don't want to hold the bond forever.

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There does not exist a rule to choose properly the risk-free rate, but, usually, one chooses the 1-month T-Bill or the 3-month T-Bill in the academic literature; often, it used the overnight interest rate too.

I suggest you to choose the 1st one, because, according to me, it mirrors better the concept of risk-free, since it is more liquid and with less perceived risk than the 3-mont one. Moreover, a fixed- income security is perceived as riskier as longer is the maturity, so, reasonably, you should use the 1-Month T-Bill rate as risk free rate.

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  • $\begingroup$ Thanks. Where can I get the bid/ask for the TBill? BTW, my bond is trading at 101.25 (premium) are TBills quoted the same way? If not how can I normalize it so it will appear to be in the same notation $\endgroup$ – NinjaGaiden May 6 '15 at 23:41
  • $\begingroup$ Sorry @user3589054, but this is not a forum but a Q&A site, so, you should ask this question for by posting another one and not here! Anyway, if the answer fulfilled the question, please mark the answer as checked! If I am able to do that, I will be happy to answer to second question after. $\endgroup$ – Quantopik May 7 '15 at 11:58
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    $\begingroup$ The overnight rate is also used in some cases. $\endgroup$ – pyCthon Jul 5 '15 at 17:44
  • $\begingroup$ Yes, I'll update the answer! Thanks for the suggestion @pyCthon! $\endgroup$ – Quantopik Jul 5 '15 at 22:42

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