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Why the risk free rate of the loan is the discount rate

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If you ?nance your masters by taking a loan at a fair interest rate, it should not enter the calculation. The loan itself is a zero net present value transaction - you get 18K today, and pay back later at an interest rate equal to the risk-free rate. Since the risk-free rate is also the discount rate, the result is a zero NPV transaction. (This would change if the loan was subsidized, that is, if you got a below market interest rate loan.)

Problem 1: Why the risk free rate of the loan is the discount rate?

Reference no: EM132725152

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