The return on domestically held short-dated government bonds is normally perceived as a good proxy for the risk-free rate. In business valuation the long-term yield on the US Treasury coupon bonds is generally accepted as the risk-free rate of return. However, theoretically this is only correct if there is no perceived risk of default associated with the bond. Government bonds are conventionally considered to be relatively risk-free to a domestic holder of a government bond, because there is by definition no risk of default – the bond is a form of government obligation which is being discharged through the payment of another form of government obligation (i.e. the domestic currency). In fact, default on government debt does happen, so if in theory this is impossible, then this points out a deficiency of the theory. Another issue with this approach is that with coupon-bearing bonds, the investor does not know ex-ante what his return will be on the reinvested coupons (and hence the return cannot really be considered risk-free).
The return on domestically held short-dated government bonds is normally perceived as a good proxy for the risk-free rate. In business valuation the long-term yield on the US Treasury coupon bonds is generally accepted as the risk-free rate of return. However, theoretically this is only correct if there is no perceived risk of default associated with the bond. Government bonds are conventionally considered to be relatively risk-free to a domestic holder of a government bond, because there is by definition no risk of default – the bond is a form of government obligation which is being discharged through the payment of another form of government obligation (i.e. the domestic currency). In fact, default on government debt does happen, so if in theory this is impossible, then this points out a deficiency of the theory. Another issue with this approach is that with coupon-bearing bonds, the investor does not know ex-ante what his return will be on the reinvested coupons (and hence the return cannot really be considered risk-free).