question is: Discuss the following statement, "government bonds provide a risk-rate of return". The solution suggests repo rates are the benchmark risk-free rate used by investors. Hull page 94 states "As mentioned in chapter 3, banks and other large financial institutions tend to use the LIBOR rate rather than the Treasury rate as the "risk free rate"...". The do not suggest repo rates are widely used as the risk free rate. Can someone at Acted confirm whether Hull is correct or is the assignment solution is correct? Thanks
Hi Gareth Perhaps the wording in the ActEd solution is a bit too dogmatic here. The point is that investors (of which there are many different types, operating in many different environments) may not consider yields on government bonds to be the most appropriate benchmark for deciding what constitutes their "risk-free rate". David Hopkins (ST6 Tutor)
