Risk-free interest rate
The risk-free interest rate is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time. [1] Since the risk-free rate can be obtained with no risk, any other investment having some risk will have to have a higher rate of return in order to induce any investors to hold it. In practice, to infer the risk-free interest rate in a particular situation, a risk-free bond is usually chosen—that is, one issued by a government or agency whose risks of default are so low as to be negligible. Contents 1 Theoretical measurement 2 Proxies for the risk-free rate 3 Application 4 See also 5 References Theoretical measurement As stated by Malcolm Kemp in Chapter five of his book Market Consistency: Model Calibration in Imperfect Markets , the risk-free rate means different things to different people and there is no consensus on how to go about a direct measurement of it. One interpretation of the theoretical ri