What is the 'RiskFree Rate Of Return'
The riskfree rate of return is the theoretical rate of return of an investment with zero risk. The riskfree rate represents the interest an investor would expect from an absolutely riskfree investment over a specified period of time.
In theory, the riskfree rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the riskfree rate.
In practice, however, the riskfree rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a threemonth U.S. Treasury bill is often used as the riskfree rate for U.S.based investors.
BREAKING DOWN 'RiskFree Rate Of Return'
Determination of a proxy for the riskfree rate of return for a given situation must consider the investor's home market, while negative interest rates can complicate the issue.
Currency Risk
The threemonth U.S. Treasury bill is a useful proxy because the market considers there to be virtually no chance of the government defaulting on its obligations. The large size and deep liquidity of the market contribute to the perception of safety. However, a foreign investor whose assets are not denominated in dollars incurs currency risk when investing in U.S. Treasury bills. The risk can be hedged via currency forwards and/or options but impacts the rate of return.
The shortterm government bills of other highly rated countries, such as Germany and Switzerland, offer a riskfree rate proxy for investors with assets in euros or Swiss francs. Investors based in less highly rated countries that are within the eurozone, such as Portugal and Greece, are able to invest in German bonds without incurring currency risk. By contrast, an investor with assets in Russian rubles cannot invest in a highly rated government bond without incurring currency risk.
Negative Interest Rates
Flight to quality and away from highyield instruments amid the longrunning European debt crisis has pushed interest rates into negative territory in the countries considered safest, such as Germany and Switzerland. In the United States, partisan battles in Congress over the need to raise the debt ceiling have sometimes sharply limited bill issuance, with the lack of supply driving prices sharply lower. The lowest permitted yield at a Treasury auction is zero, but bills sometimes trade with negative yields in the secondary market. And in Japan, stubborn deflation has led the Bank of Japan to pursue a policy of ultralow, and sometimes negative, interest rates to stimulate the economy. Negative interest rates essentially push the concept of riskfree return to the extreme; investors are willing to pay to place their money in an asset they consider safe.

RiskFree Asset
An asset which has a certain future return. Treasuries (especially ... 
RiskNeutral Measures
A theoretical measure of probability derived from the assumption ... 
Market Risk Premium
The difference between the expected return on a market portfolio ... 
Low Interest Rate Environment
A low interest rate environment is when the riskfree rate of ... 
OptionAdjusted Spread (OAS)
A measurement of the spread of a fixedincome security and the ... 
Risk Premium
The return in excess of the riskfree rate of return that an ...

Investing
RiskFree Rate of Return
The riskfree rate of return is the theoretical rate of return of an investment with zero risk. The riskfree rate represents the interest an investor would expect from an absolutely riskfree ... 
Investing
Understanding Market Risk Premium
Market risk premium is equal to the expected return on an investment minus the riskfree rate. The riskfree rate is the minimum rate investors could expect to receive on an investment if it ... 
Financial Advisor
RiskFree & 20% Return? More Like 100% Scam
An investment that promises a riskfree return of 20% is 100% likely to be a scam. 
Managing Wealth
How Interest Rates Affect Property Values
Along with their impact on mortgages, interest rates affect capital flows, the supply and demand for capital, and an investorâ€™s required rate of return. 
Trading
How & Why Interest Rates Affect Futures
There are at least four factors that affect change in futures prices, including risk freeinterest rates, particularly in a noarbitrage environment. 
Investing
How to Calculate Risk Premium
Think of a risk premium as a form of hazard pay for risky investments. 
Investing
What Investors Should Know About Interest Rates
Understanding interest rates helps you answer the fundamental question of where to put your money. 
Investing
Calculating the Equity Risk Premium
Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the riskfree rate. 
Investing
Why RiskFree Investments Don't Exist
We explain the risks inherent with all types of investments and why riskfree investments do not exist. 
Investing
Find The Right Discount Rate Amid Post2007 Risks
OIS discounting has become part of standard valuation techniques, in a market in which there is more uncertainty and less proxies for the riskfree rate.

How is it possible for a rate to be entirely riskfree?
Find out whether there really is such a thing as a riskfree rate of return, and learn why taking the idea of riskfree rates ... Read Answer >> 
How is the riskfree rate of interest used to calculate other types of interest rates ...
Learn how the riskfree rate is used to compare the yields on bonds, and understand how Tbills are used as a proxy for the ... Read Answer >> 
What is the correlation between equity risk premium and risk?
Learn about the relationship between the riskfree rate of return and the equity risk premium, and understand how the riskfree ... Read Answer >> 
What nations other than the U.S. have riskfree interest rates?
Find out which countries have riskfree rates of returns. This is typically the yield on a 3month note, and it can be negative ... Read Answer >> 
How is bond yield affected by monetary policy?
Learn about how bond yields are affected by monetary policy. Monetary policy determines the riskfree rate of return, which ... Read Answer >> 
How accurate is the equity risk premium in evaluating a stock?
Learn about the drawbacks of using the equity risk premium to evaluate a stock, and understand how it is calculated using ... Read Answer >>