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The risk-free interest rate doesn't exist...

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sat Dec 23rd, 2006 at 05:14:52 PM EST
[ Parent ]
Well, let's call it the best approximation of it and forget about the approximation :).
by Laurent GUERBY on Sat Dec 23rd, 2006 at 06:12:57 PM EST
[ Parent ]
I have a serious point to make with that, and that is that the assumption that there is a single lowest interest rate at which it is possible to both lend and borrow is simply not true. Well, it might be true for banks (i.e., market makers), for instance in London they can all borrow from each other at LIBOR, but other market participants don't have access to that, and can borrow and lend at different rates.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sat Dec 23rd, 2006 at 06:17:41 PM EST
[ Parent ]
The risk free rate is when someone lends to the state, and in France at least you can buy various "BTAN", "OAT"  that gives you this rate (with a tiny spread, France being one of the best borrower of the eurozone and also near zero bank margins), the government recently announced measures to ease the access to state debt for consumers.

By definition lending to any other entity will get a higher rate.

And of course banks take their margin for most products, I believe I would get interest of EURIBOR 3 or 6 monthes minus 15 basis point if I block money for the duration at my bank.

by Laurent GUERBY on Sun Dec 24th, 2006 at 04:48:31 AM EST
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And only the state gets the risk-free rate when they borrow, banks get interbank rates (LIBOR, EURIBOR...) and people get the shaft.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sun Dec 24th, 2006 at 04:52:13 AM EST
[ Parent ]

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