Risk-Free Rate Yield Calculator
Calculate the annualized risk-free rate based on Treasury Bill pricing.
How to Calculate Risk-Free Rate in Excel
The Risk-Free Rate (Rf) represents the theoretical return of an investment with zero risk. In practice, financial analysts use the yield of government-issued securities, such as US Treasury Bills, as the proxy for the risk-free rate in models like CAPM (Capital Asset Pricing Model).
1. Calculating from T-Bill Price
If you have the purchase price and the face value of a zero-coupon Treasury Bill, you can calculate the annualized risk-free rate using the following logic in Excel. Assume Face Value is in cell A2, Price is in B2, and Days to Maturity is in C2.
=((A2/B2)-1)*(365/C2)This provides the Bond Equivalent Yield (BEY), which is the most common way the risk-free rate is quoted for financial modeling.
2. Using the YIELD Function
For interest-bearing government bonds, Excel provides a built-in function. The syntax is:
=YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis])- Settlement: The date you purchased the security.
- Maturity: The date the security expires.
- Rate: The coupon rate (0 for T-Bills).
- Pr: The price per $100 face value.
- Redemption: The redemption value (usually 100).
3. Real-World Application (CAPM)
When calculating the Cost of Equity in Excel, the formula is: =Rf + Beta * (Rm - Rf). You must ensure that the Risk-Free Rate (Rf) matches the time horizon of your expected returns. Usually, a 10-year Treasury Note yield is used for long-term equity valuations.
Example Calculation
If a 91-day T-Bill with a face value of $1,000 is selling for $980:
- Holding Period Return = (1000 – 980) / 980 = 2.04%
- Annualized Rate (BEY) = 2.04% * (365 / 91) = 8.18%