The riskfree rate is the rate of return of an investment with no risk of loss. Most often, either the current Treasury bill, or Tbill, rate or longterm government bond yield are used as the riskfree rate. Tbills are considered nearly free of default risk because they are fully backed by the U.S. government.
The market risk premium is the difference between the expected return on a portfolio minus the riskfree rate. The market risk premium is a component of the capital asset pricing model, or CAPM, which describes the relationship between risk and return. The riskfree rate is further important in the pricing of bonds, as bond prices are often quoted as the difference between the bond’s rate and the riskfree rate.
Treasury Bills
The riskfree rate is hypothetical, as every investment has some type of risk associated with it. However, Tbills are the closest investment possible to being riskfree for a couple of reasons. The U.S. government has never defaulted on its debt obligations, even in times of severe economic stress. Tbills are shortterm securities that mature in one year or less, usually issued in denominations of $1,000. Tbills are auctioned at or below their par value, and investors are paid the par value of the security upon maturity.
Since Tbills are paid at their par value and do not have interest rate payments, there is no interest rate risk. Anyone is free to buy Tbills at weekly Treasury auctions. They are a very simple instrument for investors to understand. Tbills are issued by the government to fund the national debt. Yields on longterm government bonds are sometimes used as the riskfree rate depending on the investment being analyzed.

Use market risk premium for expected market return
Find out how the expected market return rate is determined when calculating market risk premium – and how to estimate investment ... Read Answer >> 
What's the difference between bills, notes and bonds?
Treasury bills (TBills), notes, and bonds are marketable securities that the U.S. government sells to pay off maturing debt ... Read Answer >> 
How do I calculate the cost of equity using Excel?
Learn how to calculate the cost of equity in Microsoft Excel using the capital asset pricing model, or CAPM, including brief ... Read Answer >> 
What is the historical market risk premium?
Learn what the historical market risk premium is and the different figures that result from an analyst's choice of calculations ... Read Answer >> 
Why Do Commercial Bills Yield Higher Than TBills?
The reason that commercial bills have higher yields than Tbills is due to the credit quality of each bill type. Find out ... Read Answer >> 
How are treasury bills (Tbills) taxed?
Lear how the Internal Revenue Service collects taxes on treasury bills (Tbills) purchased from the United States government ... Read Answer >>

Investing
How Risk Free Is the RiskFree Rate of Return?
This rate is rarely questioned—unless the economy falls into disarray. 
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 ... 
Investing
The Basics Of The TBill
The U.S. government has two primary methods of raising capital. One is by taxing individuals, businesses, trusts and estates; and the other is by issuing fixedincome securities that are backed ... 
Investing
The Money Market: A Look Back
Learn how past inflationary periods can predict future real rates of return for cash investments. 
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
Calculating the Equity Risk Premium
See the model in action with real data and evaluate whether its assumptions are valid. Here is how to calculate the equity risk premium. 
Investing
Tactical Tips For Bond Investors
Profit from longterm market trends by buying bonds when other investors shy away. 
Investing
The Advantages and Disadvantages of the CAPM Model
In many situations, CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC.

RiskFree Asset
A riskfree asset is an asset which has a certain future return ... 
RiskFree Rate Of Return
The riskfree rate of return is the theoretical rate of return ... 
Government Paper
Government Paper are debt securities that are issued or guaranteed ... 
Capital Asset Pricing Model  CAPM
Capital Asset Pricing Model is a model that describes the relationship ... 
Treasury Yield
Treasury yield is the return on investment, expressed as a percentage, ... 
Treasury Bond  TBond
A treasury bond is a marketable, fixedinterest U.S. government ...