Risk-free interest rate

The risk-free interest rate or risk-free interest rate is an interest rate that is paid on a market for an investment in a debtor, where there is no risk of the general opinion that interest and repayment can not be made on time ( = no default risk ).

It therefore constitutes an important point of reference for comparison with risky assets and provides for income investments yield a lower limit Represents the risk of income investment is often indicated by the distance from its return to the risk-free rate. In general, the difference between the actual return on a risky investment and the risk-free interest rate is referred to as a return of the investment.

While the term " risk-free interest rate " an established concept in the financial market theory and integral part of many current capital market models (eg CAPM ), there are no fixed rules as he is to be determined, and it is as such not officially established.

In practice, one must determine for each situation individually considered the appropriate risk-free rate. Firstly, all interest rates always apply for a particular currency, for others you have to consider the relevant investment period. Usually one takes as an interest rate determined in the money market or capital market interest rate, in this case the interest rate of the cash strongest debtor must pay in one currency for a specified term. It is assumed that the duration of the interest rate used as a reference coincides almost exactly with the period required for the risk-free investment and that the chosen reference system is sufficiently strong traded.

For these reasons, government yields or proper banking facilities are used as risk free rate in the rule. For the euro, yields on German Bunds a similar term is used for long -term investments normally. The Federal Republic of Germany is considered one of the safest borrowers in the euro area bunds and there have the highest trading volume. For systems up to one year to maturity either used, yields shorter running Federal securities, or public trading day determined interbank interest rates, for example, the EURIBOR. English-language literature generally called the 3- month Treasury bond of the U.S. government, as it is directly guaranteed by the U.S. government and hardly changed by the short transit time through inflation or changes in interest rates ..

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• Investment Appraisal
• Interest income