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.
Itâ€™s a theoretical concept, because in reality, no investment is entirely without risk. When you buy stock or other investments, there is always a chance that you will lose money.
Theoretically, even the United States government has a chance of defaulting on its bonds, but because that is very unlikely, the riskfree rate is usually based on the current interest rate of a threemonth U.S. Treasury bill, since it is just about the safest investment you can make.
Why is the riskfree rate important?Â It is important to economists and financial institutions because they use it as the starting point for calculating the cost of equity and capital.Â For instance, a bank considering a loan application will start with the riskfree rate and then add additional interest for other risk components such as default risk, inflation risk, and, if the loan is to a foreign company, currency risk.
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In This Series

Investing
How Risk Free Is The RiskFree Rate Of Return?
This rate is rarely questioned  unless the economy falls into disarray. 
Investing
How Safe Are U.S. Bonds?
U.S. Treasury securities are often described as riskfree investments, but that is just not true. 
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. 
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. 
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
More Ways to Evaluate Portfolio Performance
The Jensen measure is another tool investors use to include risk when measuring portfolio performance. 
Investing
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth.