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I have a list of monthly returns of a 10 year Govt Bond. I am not sure if this is a good proxy for the monthly risk free rate of return.

Can somebody suggest how I can derive the monthly risk free rate of return from this monthly return of Govt Bonds. Ofcourse, this is just a simple case. I don't want to take in account any default probabilities of the Govt (Sovereign risk etc).

Simple put is the monthly return of a 10 Year Govt bond a good proxy for risk free rate over a month?

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I would answer your question with no.

  • First: what do you need the risk free rate for? If you want to price equity derivatives then probably a short money market rate would better fit this purpose.
  • Second: the maturity. Look at yield curves. The short end is usually at a very different level than the 10 year rate.

So two times no. A small "no" for taking government rates for the risk free rate and a big "no" for taking the 10 year rate for a monthly rate.

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jup, just devide it through 12 :) Example /between 2004-2008): Average annualized T.Bill rate =3,27% Monthly Riskfree rate = 3,27%/12 = 0,272%

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  • $\begingroup$ the question is about 10-year bonds, they're called notes for treasuries. T.Bill's are up to 1 year maturity. $\endgroup$
    – Aksakal almost surely binary
    Commented Mar 1, 2014 at 19:04
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here's your answer enter image description here

basically, I'm saying NO, it's not a good proxy at all

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