Risk-Free Rate Of Return

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DEFINITION of 'Risk-Free Rate Of Return'

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

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BREAKING DOWN 'Risk-Free Rate Of Return'

In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.

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RELATED FAQS
  1. What does a high equity risk premium signify about a company's stock future?

    A high equity risk premium signifies that a company's stock future is uncertain. Equity risk premium is the excess return ... Read Full Answer >>
  2. What nations other than the U.S. have risk-free interest rates?

    Countries other than the United States that have risk-free interest rates are Canada, the European Union, Japan, the United ... Read Full Answer >>
  3. How is it possible for a rate to be entirely risk-free?

    It is not possible for a rate to be entirely risk-free. The risk-free rate of return is a theoretical construct that underlies ... Read Full Answer >>
  4. How is the risk-free rate of interest used to calculate other types of interest rates ...

    The risk-free rate for bonds is used for pricing the yield spread as the difference between the interest rate on a bond and ... Read Full Answer >>
  5. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Full Answer >>
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    For any debt obligation to be considered completely risk-free, investors must have full faith that the principal and interest ... Read Full Answer >>

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