Risk Free Rate Definition & Application Wiki

Risk Free Rate Definition & Application Wiki

Last Updated by WikiWealth

Short Definition

The rate of interest with no risk. Usually, the US treasury yield curve is used as the risk free rate of interest measure for US companies. WikiWealth uses the 20 year rate for all investments, because a long-term investor should have at least a 20 year time horizon.

WikiWealth uses the US treasury rate, because it is the safest and longest tenured rate available. The US currency is used as the global reserve curries, thus, added importance to the US market. WikiWealth uses US treasury rates for foreign companies, because modern finance makes it very easy to borrow international, either directly from another market, or through a SWAP with a business in the preferred borrowing market.

A local risk free rate is best used for companies with no possible access to international financial markets. These types of investments are not yet covered by WikiWealth.

The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no default risk. However, the financial instrument can carry other types of risk, e.g. market risk (the risk of changes in market interest rates), liquidity risk (the risk of being unable to sell the instrument for cash at short notice without significant costs) etc.

Long Definition

See Dictionary Terms

See Academic Resources

Source: http://en.wikipedia.org/wiki/Risk_free_rate