What is a 10 Year Treasury Note and How Can it be Used to Calculate the Intrinsic Value of a Stock?

Question

I am a Canadian, and I am trying to use an "intrinsic stock value calculator" (found here: http://buffettsbooks.com/howtoinvestinstocks/course2/stocks/intrinsic-value-calculator.html#sthash.YmLme4uz.y9zefXwy.dpbs). And the video I have used to guide me is http://www.youtube.com/watch?v=S1wbCieoHs4. The video directs the user to use the ten year treasury note's discount rate, which, as of March 24, is 1.88%.

My question is why does the calculator need that information to calculate the intrinsic value of a stock. To be honest, I don't even know what a ten year treasury note is. As a Canadian, do you think it is wise for me to use a ten year treasury note to calculate such information?

Thank you,

Kelsey.

Answer 1

It's a form of debt issued by the United States Treasury. As the name implies, a 10-year note is held for 10 years (after which you get the face value in cash), and it pays interest twice per year.

It's being used in the calculator to stand for a readily available, medium-term, nearly risk-free investment, as a means of "discounting" the value that the company gains. The explanation for why the discounting is done can be found on the page you linked.

As a Canadian you could use the yield of comparable Canadian treasury securities as quoted by Bank of Canada (which seem to have had the bottom fall out since the new year), although I don't suppose American notes would be hard for a Canadian investor to come by, so if you wanted to be conservative you could use the US figure as long as it's higher.