Friday, January 7, 2011

Risk Free Return

The 'Risk Free Return' (or risk free rate of return, or risk free interest rate) is the rate of return on the instrument with the lowest risk. This typically refers to the rate paid by the government on government debt such as bonds and bills. Government debt is generally considered to be risk free given that the government can print money (unless it is part of a currency union). It is also considered unpallatable for a government to default on its debt due to the impact this would have on the cost and availability of future financing as well as flow on economic impacts. Thus for most purposes the risk free rate is usually the 1-year government bond. The risk free return is used in benchmarking for certain types of funds, as well as in valuation and analysis.

Synonyms: Risk free rate, Risk free interest rate, Risk free rate of return

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