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The risk-free rate of return, usually shortened to the risk-free rate, is the rate of return of a hypothetical investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations.[1]
Since the risk-free rate can be obtained with no risk, any other investment having some risk will have to have a higher rate of return in order to induce any investors to hold it.
In practice, to infer the risk-free interest rate in a particular currency, market participants often choose the yield to maturity on a risk-free bond issued by a government of the same currency whose risks of default are so low as to be negligible. For example, the rate of return on zero-coupon Treasury bonds (T-bills) is sometimes seen as the risk-free rate of return in US dollars.[2]
- ^ "Risk-Free Rate of Return". Investopedia. Retrieved 7 September 2010.
- ^ Bodie, Zvi; Kane, Alex; Marcus, Alan J. (2017). Investments (11 ed.). McGraw Hill. p. 9. ISBN 9781259277177.