Question

What is the interest rate that the United States Government must pay if they want to borrow for ten years?

Does this rate change from one day to the next?

If I buy a ten-year U.S. treasury bond what cash flows would I expect to receive from the U.S. Government?

Answer 1

U.S. Treasury Bond was paying around a 3.00 percent coupon

The 10-year US Treasury Note is a debt obligation that is issued by the Treasury Department of the United States Government and comes with a maturity of 10 years. It pays interest to the holder every six months at a fixed interest rate that is determined at the initial issuance. The US Government pays the par value of the note to the holder at the expiry of the maturity period. The issuer uses the funds collected to fund its debts and ongoing expenses, such as employee salaries.

Treasury notes are issued for a term not exceeding 10 years. The 10-year US Treasury note offers the longest maturity. Other Treasury notes mature in 2, 3, 5, and 7 years. Each of these notes pays interest every six months until maturity.

The 10-year Treasury note pays a fixed interest rate that also guides other interest rates in the market. For example, it is used as a benchmark for other interest rates such as Treasury bonds and mortgage rates. One exception is adjustable rate mortgages, which are guided more by the Federal Funds rate. When setting the Federal Funds rate, the Federal Reserve takes into account the current 10-year Treasury rate of return.

The yield on the 10-Year Note is the most commonly used Risk-Free Rate for calculating a company’s Weighted Average Cost of Captial (WACC) and performing Discounted Cash Flow (DCF) Analysis.

The 10-year note is what most professionals in investment banking, equity research, corporate development, financial planning and analysis (FP&A), and other areas of finance use as the risk-free rate of return.

When calculating a company’s WACC, one of the assumptions that must be made in the cost of debt is the “risk-free rate,” which is usually equal to the yield on the 10-Year Treasury Note.

Every year the coupon amount will credited and the last year the maturity amount will be added to the coupon amount