Question

The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the:A. risk premium.B. deflated rate of return.C. risk-free rateD. expected rate of return.E. market rate of return.

Answer 1

Answer:

The correct answer is letter "C": risk-free rate.

Explanation:

The United States government issues a variety of debt obligations to finance its operations. Those with the shortest maturity are called Treasury Bills or T-Bills. One of the unique features of T-Bills is that the government does not make regular interest payments to the holder. Instead, the securities are sold at a price below its face value resulting in a profit at the maturity date.  

T-Bills are seen as low-risk investments compared to other securities being the closest to risk-free return in the market.