The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Issues in Estimating Risk-Free Rates

In the preceding section, we assumed that government bonds were for the most part default-free and that the government bond rate therefore was risk-free. Even with the euro, which was the only currency that had no government that could print more currency, we assumed that the German government was close to default-free and made our estimates accordingly. In this section, we will consider the tougher cases, where governments either have no long-term bonds outstanding in the local currency or, even if they do, are exposed to default risk. We will also look at the special case where we distrust the existing risk-free rate and believe it to be either too low or too high, given history and fundamentals.

There ...