Yield-to-Maturity (YTM) represents the yield on an investment from now until it matures. This value is different from the stated coupon rate of a bond. The risk-free rate is a comparison point to understand if the additional risk of the bond is worth it. The appropriate comparison is always a US Treasury instrument, but could be a T-Bill (1-year or less), a T-Note (1 to 10 years) or a T-Bond (10 to 30 years) depending on the maturity of the bond you are comparing.
Finding the Risk Free Rate
Determine the maturity of the bond by referencing the maturity date stated in the name of the bond.
Visit the US Treasury website at ustreas.gov to view the yield curve which details the risk free rate at various maturities. (See References 1.)
Find the yield for your bond under the column that is headed by your bond's maturity term.
Compare the resultig risk-free rate to the bond's yield-to-maturity. The greater the difference of the bond's YTM over the risk-free rate, the more risky the bond.
Steve Webb is located in Southern California and has been writing professionally since 2009. Webb is an expert in the areas of investing, banking and finance. He holds a Master of Business Administration from California State University, San Bernardino, a Bachelor of Arts in economics from the University of California, San Diego and is a Certified Treasury Professional and an Accredited Pension Representative.