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Risk-Free Rate
Definition
The theoretical return on an investment with zero risk, typically proxied by government bond yields.
How It Works
Used as the baseline in CAPM and bond pricing. In the US, the 10-year Treasury yield is the most common proxy.
Example
If the 10-year Treasury yields 4%, then Rf = 4% in your CAPM calculation.
Common Misconceptions
- ✗The risk-free rate is always constant
- ✗Any government bond qualifies
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Common questions about Risk-Free Rate
Match the duration to your investment horizon. For equity valuation, the 10-year is standard.
Government bonds still carry some inflation risk and, in theory, a tiny default risk. In practice, US Treasuries are the closest approximation to risk-free because the government can tax and print money to meet obligations.
More Glossary Terms
📉 Discount Rate🧮 Net Present Value (NPV)🎯 Internal Rate of Return (IRR)⚖️ Weighted Average Cost of Capital (WACC)📈 Beta (β)📊 Capital Asset Pricing Model (CAPM)🛡️ Risk-Free Rate💹 Market Risk Premium💲 Cost of Equity🏦 Cost of Debt♾️ Terminal Value💸 Free Cash Flow🏢 Enterprise Value🚧 Hurdle Rate🔁 Annuity♾️ Perpetuity💵 Yield to Maturity (YTM)✂️ Coupon Rate📅 Amortization🔍 Sensitivity Analysis