If cash flows are in terms of local currency and the U.S. Treasury bond rate is used to estimate the risk free rate, the analyst should add the expected inflation rate in the local country relative to that in the U.S. to convert the U.S. Treasury bond rate to a local country nominal rate.

Question

Quizplus · Accepted Answer

This is true as the U.S. Treasury bond rate is in U.S. dollar terms and does not reflect the expected inflation rate in the local country. By adding the expected inflation rate in the local country, the analyst can estimate the local country nominal rate.

If Cash Flows Are in Terms of Local Currency and the U.S