4.3  Nominal Risk Free Rate

A nominal Risk Free Rate should be adopted as the Risk Free Rate.  The nominal Risk Free Rate reflects the current cost of debt for both government and private sector and its use avoids any requirement to convert between real and nominal rates.  It avoids the private sector suffering any pricing premium or benefit arising from any difference between a derived rate (based upon a Risk Free Rate plus an inflation adjustment) and the rate in the market (the nominal rate).

Under conditions such as those prevalent currently it is appropriate to build the Discount Rate from the observed nominal rate and a balanced view of long term inflation and to place lower reliance on the observed real rates.  This allows use of consistent inflation assumptions for the bid cash flows and Discount Rate.

The Nominal Risk Free Rate should be based upon a long-term government debt instrument.  Unless the Commonwealth 10-Year Bond rate is equivalent to the cost of debt in the government concerned the Commonwealth Rate should not be used.