What is typically used as the risk-free rate in financial models?

The typical choice for the risk-free rate in financial models is the current yield on a 10-year government treasury. This is because government treasury bonds, particularly those issued by stable economies like the U.S., are considered virtually free of default risk. They represent the minimum return investors expect for taking on risk, as they are backed by the full faith and credit of the government.

Using the yield on 10-year treasuries provides a consistent benchmark because they reflect long-term expectations of interest rates and economic stability. This makes them a reliable reference point for discounting cash flows and assessing the risk premium required for other investments.

The other options are considered riskier and are not appropriate for representing the risk-free rate. High-yield bonds carry default risk, while the projected return on stocks and the dividend yield of major corporations involve equity market risks that are inherently higher than that of government bonds.