A risk-free asset is a theoretical investment offering a certain, guaranteed return with no credit risk or default risk. In practice, it is proxied by government bonds of the highest credit quality — Swiss Confederation 10-year bonds (CHF-denominated valuations) or French OATs (EUR-denominated valuations). The risk-free rate (Rf) is the base component of the CAPM and all risk-adjusted discount rates. Its selection requires attention to currency matching (CHF rates for CHF-denominated cash flows), maturity matching (typically 10 years) and current market rates at the valuation date.

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Example: for a CHF-denominated Swiss company valuation as of June 2024, Hectelion selects the Swiss Confederation 10-year bond yield of 0.80% as the risk-free rate. Adding market risk premium 6.5%, size premium 2.5% and SCRP 1.5%, the cost of equity is 11.3%. A 1% change in the risk-free rate (to 1.80%) would increase the cost of equity by 1% and reduce the DCF enterprise value by approximately 8–10% — illustrating the direct interest rate sensitivity of valuation models.

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Hectelion selects risk-free rates matched to the currency, duration and market conditions of each valuation to ensure WACC accuracy and defensibility.