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Suppose I want to compute the time value of money (present value, future value, etc). I need to put an interest rate into the calculation.

Which real world interest rate would best be used here, assuming that I'm concerned with US securities?

Should I use the Fed Funds rate? Should I use the T-bill/bond rates? If so, which period T-bill/bond rates should I use? Should I use the short-term interest rate or long-term interest rate?

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You should use the full yield curve, discounting cash flows at specific dates using the appropriate zero-coupon interest rate. As to which yield curve, that is often a matter of convention. Generally one uses the LIBOR/swaps curve for all but the most liquid products (in which case you use the treasury curve). The curve is constructed from LIBOR/Eurodollar futures at the short end and swaps at the long end.

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  • $\begingroup$ yes, that's the way to go. $\endgroup$ – SRKX Dec 28 '11 at 16:25
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Depends on circumstances - if you just trade futures intraday for yourself, secondary market T-bills (http://www.federalreserve.gov/releases/h15/data.htm#fn3) will be good enough.

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