Once we have estimated future cash flows, we need to use an appropriate discount rate (or rates) to find out their present values. That's how rational investment decisions are made: by comparing present values of different alternatives.

There are two factors that determine the discount rate: 1) risk-free rate and 2) risk associated with a particular investment. This section of the text deals with the former, the next one – with the latter.

Contrary to what you might have read in other financial articles and books, we do not view yield of government bonds of the investor's home country issued in local currency as the risk-free rate. I.e. in most cases it is, but generally it is not. And this is not just because governments sometimes fail to honor their own obligations (there were a few examples of governments defaulting on their local-currency-denominated paper), but because of availability of other investment opportunities, which, taking into account their probability of default, might present a very different implied risk-free rate (or rates).