What is Risk-free interest rate ?

Definition of Risk-free interest rate

Definition of Risk-free interest rate

Risk-free interest rate is the theoretical amount of return of an economical commitment with no recourse of economic loss.

Brief Explanation of Risk-free interest rate

One presentation is that the risk-free interest rate represents the eye that an investor would expect from an absolutely risk-free investment commitment over a given time period. In the exercise, to practice the risk-free interest rate in a particular situation, a risk-free bond is typically selected that is one issued by a government or agency whose risks of default are so low as to be minimal. Since the risk-free amount can be obtained with no recourse, any other economical commitment will have additional risk. The risk-free interest rate is highly significant while the general application of modern profile theory which is based on the capital asset pricing design. The risk-free interest rates are also a required input in economical computations. Note that some finance and economic concepts assume that market members can borrow at the risk-free interest rate. There are numerous issues with this design, the most basic of which is the reduction of the description of the utility of stock holding to the expected mean and difference of the returns of the profile.

 

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