Risk-Free Interest Rate


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Risk-Free Interest Rate

Describes return available to an investor in a security somehow guaranteed to produce that return. The risk-free interest rate compensataes the investor for the temporary sacrifice of consumption.

Risk-Free Return

The return on any investment with such low risk that the risk is considered to not exist. A common example of a risk-free return is the return on a U.S. Treasury security. The risk-free return exists in order to compensate the investor for the temporary tying up of his/her capital, even though it is not put at risk. See also: Capital Allocation Line, riskless investment.
References in periodicals archive ?
The Solvency II framework has been finalized, and companies started looking into aligning their EV methodologies with Solvency II -- mainly those relating to extrapolation methodology for establishing the long-term risk-free interest rate.
Finally, the price of a mortality-linked security can be calculated by discounting, at the risk-free interest rate, its expected payoff under the identified risk-neutral probability measure.
CPF members will continue to enjoy a risk-free interest rate of 4% on their Special and Medisave Accounts (SMA) from 1 October 2013 to 31 December 2013, as the 12-month average yield of 10YSGS plus 1% from 1 September 2012 to 31 August 2013 works out to be 2.
If we knew for sure that the worst outcomes from climate change could be addressed successfully in the future, then the appropriate price for emissions would actually be less than the average damages discounted by the risk-free interest rate because climate change damages would be a hedge.
The risk-free interest rate affects the price of an option in a less clear-cut way.
The risk-free interest rate is appropriate because all risk is built into the expected cash flows.
Companies will be offered with the probability of utilizing another risk-free interest rate for assessment of accountabilities than the government bond rate only.
The present value of cash flow from each technology can be obtained by discounting the risk-free interest rate 8 %.
f] is the risk-free interest rate as measured by the three-month Treasury bill.
The bank's analysts, however, kept their "neutral" stance saying the risk-free interest rate of the company is still too low and the terminal value growth is 0.
We proxy the dividend yield with the inverse of a market-wide price-earnings ratio, and estimate the expost equity risk premium by subtracting the medium-term real risk-free interest rate and an estimate of the growth rate of potential output from this earnings-price ratio.
For this study, the determinant components are identified as the risk-free interest rate, inflation, and the risk premium.